Why is Diversification so Important for Your Portfolio?

By Eric Hamilton , Oct 23, 2019 04:34 PM EDT
(Photo : Why is Diversification so Important for Your Portfolio?)

If you've ever looked into the process of investing in stocks, bonds, and other securities in the past, then you've probably heard about how important it is to diversify your assets. Diversification is one of those words that appear often in almost every discussion about investment, but not a lot of people understand what it means. Some experienced investors believe that stock diversification isn't necessary if you've already done all the right research to make sure that you've properly quantified and identified your risk. On the other hand, there are also a range of investors out there that believe the only way to protect yourself against a significant loss to is to invest in a lot of different types of opportunities. Here, we're going to take a look at the basics of diversification, and why it's a good idea for beginners. 

The Benefits of Diversification for your Portfolio

Creating a diversified portfolio for an investor is all about spreading your risk among a range of different opportunities. Part of your investment strategy might be made up by learning how to trade penny stocks, while another might involve getting involved with a range of high-value stocks that are intended to stay in your portfolio for extended periods of time. The idea is that if you don't put all of your eggs into one basket, when that basket breaks, you won't see a huge loss. 

While there are plenty of long-term investors out there that don't think diversification is necessary - it's important not to think the same way if you're in the early stages of building your portfolio. Many prudent investors will own stocks in lots of different companies from diverse industries. Some people even get involved with securities from different countries. This ensures that a single bad event in the economy or stock market won't affect all of your holdings at once. 

Diversification means that if one part of your portfolio sees a downturn because of something significant happening in the macro or microenvironment, you won't lose all of your money straight away. Even if you do lose cash, a diversified portfolio should mean that you could be gaining money in one area when you're losing it in another. 

How to Diversify your Investments

The good news is that creating a diversified portfolio is relatively simple. All you need to do is make sure that you're examining all of the different opportunities on the market when the time comes to start spending your money and building out different areas of your wealth. Even solutions like mutual funds and exchange traded funds can help with diversification if you don't have a lot of money to spend on a wide range of securities straight away. 

Another way to make the most of diversification when you're just getting started in the trading environment, is to contact a broker or expert. Most financial advisors will be able to talk you through the process of diversification with relative ease - helping you to make the most of your cash.  

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