Diversification is when you put your capital investment into different stocks in different industries. It’s one of the best investment strategies for mitigating risk. By placing all of your investment dollars in different stocks instead of just one, you’re protecting yourself from a huge financial loss. That way, if disaster strikes one of your investments, your overall losses won’t be so bad.
What Does a Diversified Portfolio Look Like?
An investment portfolio that’s property diversified will exhibit the following characteristics:
- Mix of Different Asset Classes: Asset classes include stocks, bonds, commodities such as gold, and even property. Each asset class is prone to having its own ups and downs, but it’s highly unlikely that all of them will fall at the same time.
- Investments In Lowly-Correlated Industries: If you invest in gold Exchange Traded Funds (ETF) and invest in a gold mining company, they’re considered high correlation assets. That means that if gold falls, you can expect both investments to fall even though they’re different asset classes. So invest in assets that are aren’t closely correlated with each other.
- Assets with Varying Rates of Risk and Return: It’s impossible to invest solely in low risk or high risk assets. Because low risk generally means low return and high risk means putting your entire investment portfolio in danger. The solution is to mix the two so that under-performing assets can be offset by the gains of your other assets.
How Do You Diversify Your Portfolio?
Diversification depends on your individual goals. Your portfolio must be diversified based on how long you want to stay invested (investment horizon) and what your financial end goal is. Ideally, you should speak to a stock broker or a financial adviser (FA) regarding your goals.
The last thing you want to do is spread your capital around on random investment choices without knowing how well your investments will perform.