The Importance of Diversification

Diversification is a method used to lessen the risk that you take by distributing your investments among various financial instruments, industries and other categories. It has the goal of maximizing return through placing investments in different areas that would have diverse reactions to the same event.

Diversification concept investors placing assets in different baskets

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!