Why it’s Important to diversify your investment?

May 29, 2008 · Posted in Investing 

One of the most important decisions you will have to make when investing money on any financial product, is determine how much of your portfolio will be applied on stocks, money market, bonds or maybe even real estate. The story is constantly the same, if you place all your eggs in one basket the risk of losing the whole lot is at its highest, but if they are wisely divided into various baskets, when disaster strikes, the larger portion of your assets will be saved.

Diversifying between different asset classes presents an excellent solution seeing as these assets perform correspondingly in the marketplace and are regulated by similar laws. Classes include, bonds, stocks and cash money market investments, although some specialists would also include real estate and commodities to the list.

When diversifying a portfolio it is imperative to take a fully conscious look at promising alternatives and determine which investments are worth pursuing by evaluating the risk factor associated with each asset. Shifting portions of the portfolio from stocks to bonds might decrease the overall return. Although on the positive side, the investments will be protected against abrupt fluctuations or sudden market collapses. There are many other ways in which you can diversify your portfolio. Choosing to apply your money on various different investments might be the perfect solution especially for someone who does not dominate the stock market and finds it hard to determine the good from the ugly.

Even when investing in stocks it is imperative that you diversify in order to insure higher return and lower volatility. This can be easily achieved by purchasing stocks from different industries so not to place all the eggs on one economic sector. Investing everything on the technological sector for example might be a gratifying experience especially when the market is sizzling with new ventures but the moment a shockwave ripples over that specific industry all could be lost. Such an unforgiving outcome could be easily avoided with a well pondered asset allocation strategy.

In conclusion, it is evident that diversifying your portfolio is the only way to protect the capital you’ve invested from unnecessary risks. Remember that no investments are guaranteed money makers or completely safe bets, even if the market demonstrates a clear sign of growth. Selecting a mixture of different investments is the only way to lower potential risks while insuring your portfolio is maintained flexible and most importantly, completely profitable.


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