The Importance of Diversification

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The Importance of Diversification

Any investment can be considered a risk. Every investment is subject to unexpected changes. Nothing is completely safe. If you’re narrowly invested in one stock or one sector, an unforeseen hit could be difficult to withstand. But if your investment eggs are spread around, in diverse baskets of different styles and characteristics, then the risk against inevitable change is reduced.

“Don’t put all of your eggs in one basket!” You’ve probably detected that over and over again throughout your life…and when it comes to investing, it’s very true. Diversification is the key to successful investing. All successful investors build portfolios that are widely diversified, and you should too!

Diversifying your investments might include buying several stocks in many different industries. It may include buying bonds, investing in money market accounts, or even in a few real property. The key is to invest in several different areas – not just one.

Over time, search has shown that investors who have diversified portfolios typically see more consistent and stable returns on their investments than those who just invest in one thing. By investing in several different markets, you’ll really be at less risk as well.

For example, if you’ve invested all of your money in one stock, and that stock takes a significant plunge, you’ll most likely find that you’ve lost all of your money. On the other hand, if you’ve invested in ten different stocks, and nine are doing well though one plunges, you’re still in reasonably good shape.

A good diversification will typically include stocks, bonds, real property, and cash. It may take time to diversify your portfolio. Depending on how much you’ve to initially invest, you may have to begin with one type of investment, and invest in other areas as time goes by.

This is okay, but if you may divide your initial investment among several types of investments, you’ll find that you’ve a lower risk of losing your money, and over time, you’ll see better returns.

Experts also suggest that you spread your investment money evenly among your investments. In other words, if you begin with $100,000 to invest, invest $25,000 in stocks, $25,000 in real property, $25,000 in bonds, and put $25,000 in an interest bearing savings account.

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February 19 2009 05:54 am | Personal Finance

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