2. Introduction
There are good reasons financial managers consistently
advise their clients to diversify their investment portfolios.
A diverse portfolio serves as a major protection against risk
and increases your chances for stability and return.
When you diversify your portfolio among multiple types of
investments, you reduce your risk of loss because market
conditions that disrupt one category may spare others. All
investments, regardless of their degree of diversification,
are subject to inherent and systematic market risks that
include volatile political conditions, currency exchange
rates, inflation, and interest fluctuations. However, by
diversifying, you create a hedge against other kinds of risks
that are specific to a region, type of business, or market.
3. About Diversification
To achieve the best degree of diversification, spread your
investments over a wide swath of not only companies, but also
industries. While stocks in several health-related companies
might all be affected by the same unforeseen event, owning other
investments in the transportation and entertainment industries,
for example, can increase your level of independence from a
catastrophe in one sector.
You will also want to diversify among classes of assets, because
different types of financial instruments usually react differently
to the same shifts in market conditions. Consider a portfolio that
contains, for example, both stocks and bonds. Also, look at the
benefits in owning mutual funds, real property, and other types
of investments. Your adviser may additionally ask you to diversify
horizontally by choosing investments in small-, medium-, and
large-capitalization companies.
4. Conclusion
Other kinds of investments include United States
Treasury Bills, money market funds, and international
stock mutual funds. Each asset class offers positives
and negatives, and diversification offers a greater
chance of achieving long-term stability in today’s
rapidly shifting markets. Ask your financial
professional to assist you in allocating your
investments in the way that works best for your
individual situation.