Diversification might not be the most important to investors,
but it plays a role significant enough to not be ignored. This shouldn't be pushed aside. This technique can be used for protection since it
can help ensure that you will not lose everything in a single blow.
Remember that diversification should be done to different
markets, in different vehicles. A good mix of mutual funds, stocks,
and bonds can help your investment portfolio. You should also find and add
safer investments.
Still not convinced? Let’s discuss in detail why you should
implement portfolio diversification in your investments.
Limits Biases
This can help in staying emotionally detached from your
investments, therefore lowering the chances of attachment. Most of the time, if
an investor ends up getting ruled by his or her emotions, he or she tends to do
irrational decisions mostly based on how they feel.
For example, if you grow attached to stock you own and it
ends up performing badly in the market, you might be blinded on this fact and
decide to keep the stock despite clear signs pointing to a bearish market.
Lessens Risks
The more markets you get involved in, the more different
outcomes you can get. An event might affect one market negatively, but another
one might stand to gain more from that event.
Not to mention that having a diversified portfolio means
lower risk which pretty much allows you to endure almost any economic downturn.
Let’s put it this way, if you put all your investments in
one stock and that stock ends up losing 50 percent of its value over the course
of a year that means that you just lost 50 percent of your portfolio. But, if
that stock only makes up 4 percent of your portfolio, a huge drop-off like that
will hardly affect you.
More Opportunity
At the end of the day, diversification opens up more
opportunities for you. Theoretically, having additional opportunities could
expose you to more risk, which is why you have to study well about your investment
before committing to anything.
Typical sectors to invest in include commodities (metals and
energy), financials, telecommunications, and technology. The more mixed your
investments are, the better for your portfolio.
Just make sure that you have enough capital for the sectors
that you decide to invest in. It’s not bad to start with two investments and from there, begin working your way to other sectors.
Begin diversifying
your portfolio by joining us today at FSMSmart!
We will keep you updated on the latest market news and provide
you with all events
that might come up and affect your investments. Register for an account now!
