There’s one phrase that really captures the meaning of diversification, the phrase “don’t put all of your eggs in one basket”. A diversified investment is a portfolio of various assets that gains profit with the least risk. It’s a technique that reduces risk by having multiple investments.
In this short article, we will give you a brief insights on the importance of diversification in your investment portfolio so you can apply this in your investing strategy.
Why should you diversify?
It minimizes the risk of loss.
If you don’t diversify and there’s only one company stocks in your portfolio, your portfolio will drop in value when the share prices of the company stocks drop. But if you diversify and counterbalance the company stocks with another company stocks, then only part of your portfolio will be affected.
It safeguards you from the adverse markets.
Other than splitting your investments in various companies, it’s important to diversify among different asset classes. With a mixture of stocks and bonds, you are able to reduce your portfolio’s sensitivity to market swings, because different assets will not react in the same way to adverse events. For them to decline in the same magnitude, at the same time, is only going to happen once in a blue moon.
It exposes you to more opportunities for return.
When you diversify your portfolio based on different locations, or own more international shares, you may find growth opportunities in other countries that beyond your own geographical borders. Remember, volatility in the United States may not affect the markets in Europe.
Although diversification is able to manage risk on your portfolio, you have to understand that it’s impossible to fully eliminate the risk. Firstly, it may not be easy to manage a diverse portfolio. Also, not all investment vehicles offer the same cost, so buying and selling can be more expensive.