Income diversification is the process of investing in a variety of different income-producing assets to reduce your risk. If you only have one source of income, and that source is disrupted or stopped, you will be left in a difficult financial situation.
By diversifying your income, you spread out your risk and are less likely to experience a financial crisis if one of your income sources dries up. There are many types of investments you can make to achieve income diversity.
Some of the most common include stocks, bonds, foreign exchange, gold, real estate, and mutual funds. Each has its risks and rewards, so it’s important to do your research before investing in any of them. Here’s how they differ.
Stocks
Stocks represent a share in the ownership of a corporation and entitle the owner to receive dividends and/or to sell their shares at either a higher or lower price than what they paid for them. Owning stocks can entitle you to voting rights and/or to a share of the company’s profits in the form of a dividend.
You can choose to either sell your stock or reinvest your dividends by buying more stock. Owning a stock means that you become a partial owner of the corporation. As part of owning a share in a corporation, you also have an obligation to contribute to its debts. When a corporation fails, you could lose your investment.
Bonds
A bond is a debt investment in which an investor loans money to a corporation or government in exchange for interest payments. The main advantage of owning a bond is receiving a steady, guaranteed source of income, and depending on the type of bond you purchase, your regular interest payments may be tax-exempt.
Like stocks, bonds can also lose value and you could risk losing your entire investment. That’s why it’s important to do your research and understand what you’re investing in before purchasing a bond.
Foreign Exchange
The foreign exchange market, or forex, is a global decentralized network of buyers and sellers, who trade currencies with one another. There are many forex brokers you can work with, so it’s important to understand how traditional banks trade forex and shop around to find the best one for you.
The forex market is very liquid, meaning that it’s easy to buy and sell your currency at a reasonable price. However, the market moves quickly and is extremely volatile, so it’s very easy for you to lose a lot of money if you don’t have a well-thought-out trading strategy.
Gold
In some ways, gold is the most common form of investment when it comes to income diversification. There are many reasons why people choose to invest in gold. Like other precious metals, it can protect your assets in uncertain economic times.
Gold has also historically outperformed all other currencies and commodities, making it an attractive investment. It’s often used as a hedge against inflation because its value tends to rise during times of instability. However, gold has low liquidity and is usually difficult to liquidate, which means that you may not be able to sell it as quickly as other assets.
Real Estate
Real estate is another popular choice among investors. When you invest in real estate, you become a partial owner of an income-producing property. You can choose to rent out your property for a fixed monthly payment, or you can choose to sell it for a profit after the real estate market has gone up.
While real estate provides you with a steady source of cash flow, it requires you to be hands-on and manage your property. You also run the risk of losing money if your property fails to produce income, or if it provides less income than you anticipated.
Mutual Funds
A mutual fund is a pool of assets, such as stocks and bonds, that invests in companies or government securities. It’s an investment in which the investor buys units of the fund, called shares. A mutual fund gives you the ability to invest in a diversified basket of securities that is professionally managed.
Mutual funds are usually seen as a safer way to invest for those specific reasons. However, it can be difficult to determine the fees you’re incurring for a mutual fund, and if your money is tied up in a single fund for a long period, you run the risk of losing money as that fund’s assets decline.
Investing your money is a great way to prepare for the future. It can be risky, but with diversification and research, you can create an investment portfolio that will provide both stability and growth over time.
