Diversification is a Protection and Power for Successful Investment
July 14, 2022
The healthy diversification of a portfolio of stock and bond securities makes it possible to avoid errors that could prove to be very costly.
Although there are many strategies for managing risk when investing, diversification is probably the best known and most frequently used, which is a testament to how effectively many investors understand it.
Simply put, diversification is the process of spreading your investment capital across various assets, in order to limit your exposure to a single asset. It is a concept that is essentially based on the principle of ancestral wisdom which is to “Do not put all your eggs in one basket”.
By holding a variety of assets in your portfolio, whether a range of stocks from different sectors and countries and/or assets in different asset classes, overall risk can be significantly reduced with the help of Stock Advisory Services.
Diversification works because different assets can react differently to the same market events. One stock may react very negatively, while another will react less negatively or even positively. If your portfolio is sufficiently diversified with a variety of assets, it makes sense that major losses are much more likely to be avoided.
Invest responsibly with diversification
Financial markets always involve an element of risk; indeed, like everything in life, when we are lucky enough to win, we also risk losing.
Savvy investors understand the need to be prudent and responsible, and incorporate proven risk management methods, such as diversification, into their investment strategies.
Diversification is one of the absolutely fundamental concepts in the subject of savings and investment.
Many of you will probably already know the meaning of the term diversification outside of the financial context. For example, a company can choose to diversify its range of products, its outlet markets, its energy sources, etc.
But in general, what underlies the concept of diversification is the objective of not depending on a single element and therefore of not concentrating all the risks on a single factor.
The goal is therefore to spread as much as possible our investments in a wide range of instruments to reduce the overall risk of the portfolio.
Why is diversification important?
The function of diversification is a concept often not understood by the saver or novice investor. The latter is often used to investing, for example, in the single share or bond of a company, because perhaps the bank, his consultant, or friend on duty advised him in this way.
But in reality, what he is doing is concentrating all of his money (and therefore the financial risk) on a single company. This is clearly what should not be done, as it would be like gambling.
In fact, if things get bad for the company, we could suffer a loss, even a considerable one, of our money.
A brief parenthesis
Diversification does not completely eliminate risk. There is no possibility of investing your savings without any risk, or at least if there is no risk there is also no return. Risk is really a basic component, which allows, if managed correctly, to obtain returns over time.
But diversification serves precisely to avoid the concentration of risks in a single way as we need to reduce risks, divide them and divide them in such a way as to allow our money and savings to no longer be dependent on the performance of a single company or of a single sector.