Diversification, diversification, diversification - A different angle for emphasizing the importance of diversification
It seems to be all we hear about when taking advice from others about investments. However, it can be tricky to see the benefits of diversification when we’re doing so well with one type of investment. If your real estate is doing well for you, why not continue buying more real estate? If you’ve cracked the code for crypto, why would you suddenly pivot into stocks and bonds?
In order to ensure the overall stability of your portfolio, diversification is key. If you’re still on the fence, keep reading to see how other businesses and industries applied diversification in order to remain relevant and bolster their bottom line.
First things first, what is diversification? Simply put, diversification is the act of not putting all your eggs in one basket. In the world of investing, the best thing we can strive for is low risk, high reward. Diversifying your portfolio is one of the best ways to reach that goal.
By spreading your investments or your business across multiple assets, you’re better able to manage risk. Diversification helps you limit your exposure to individual risks while ensuring higher returns in the long term. When you have your funds across more than one asset, you don’t need to worry as much about whether or not an individual investment is performing well, but rather you’re able to look at your portfolio as a whole to see how it’s doing.
To better understand the inherent benefits of diversification, let’s take a look at how it works in a context other than investments. The farming industry is one area where diversification was an essential strategy for many farms to remain profitable. Traditionally, most farms focused on producing a specific type of crop or livestock. However, over time, demand may change for that product, or the natural growth might not be as fruitful one year as compared to previous ones. In order to mitigate the risk of a dip in profits, the farming sector started to diversify its income streams in a few ways:
Today, 37% of UK farmers are using part of their land for non-farming activities such as the ones mentioned above. These farms still operate as originally intended, but now offer additional services that bring in income they wouldn’t have had by solely focusing on one product that’s strictly farming-related. Diversifying their income streams helped them increase their profits while managing the risk that comes with losing revenue due to the supply or demand of a crop.
Farmers aren’t the only ones who have discovered the benefits of diversification. Many successful companies have relied on diversification to stay relevant, increase their profits, and also grow over time.
Today, Disney as a brand has a net worth of over $120 billion thanks to the diversification of its assets. The company got its start in the 1920s with a simple animation of its iconic character, Mickey Mouse, but what the company is known for today stretches way beyond its humble beginnings.
Disney started diversifying its assets early on in its business by founding the Mickey Mouse Club in 1929, and even started working on producing music, tv shows, and war-era films in the 40s and 50s. Then, in 1955, Disney took the risk of branching out into real estate and opened the first Disneyland.
Later on in 1984 when Michael Eisner became CEO of Disney, he continued to push diversifying the company into even more assets. At the direction of Eisner, Disney would grow into new markets aside from the theme park and entertainment industry and acquired new assets such as the Disney cruise lines, an NHL team, and resorts. When the US market was nearly completely saturated, he also focused on expanding internationally with theme parks around the world.
How did this turn out for Disney? Within 5 years of Eisner heading Disney, the company’s revenues more than doubled from $1.6 billion to $3.49 billion. Diversifying Disney’s assets was a huge part of that growth as the brand started to see a much more significant portion of its revenue coming from streams like merchandising, hotels, and its international holdings.
Diversification is not a concept that exists solely as a theory. It’s been applied to businesses in multiple industries with results showing both growth in the scope of a business as well as its revenue. Many people might be skeptical of diversifying their investments at first since they feel like they want to stick with what they know best. However, to understand the benefits of diversification, we simply have to look at the success farmers have seen with expanding into tourism, and how much Disney grew as a brand instead of remaining strictly an animation studio. Learning the ins and outs of a different type of investment comes with a learning curve, but the benefits of diversifying your portfolio will surely outweigh the obstacles of doing so.