What Is Diversification of Investments? Why Should You

 Let’s take a look at what diversification is and why it's important to diversify your investment portfolio.

What is Diversification of Investments?

Diversification is creating an investment portfolio that includes securities from different asset classes.

An asset class (or asset category) is a group of similar types of investments. These investments share similar characteristics, may react in a similar way to market influences, and are usually subject to the same rules and regulations. By having elements of different investment classes in your portfolio—including stocks, bonds, cash, real estate, gold, or other commodities—you can protect your portfolio from losing the value that it might if it only contained one failing asset category.

Diversifying spreads risks across various investments, reducing the impact that poor returns from any one investment are likely to have on the overall portfolio.

If you hold just one investment and it performs badly, you could lose all of your money. If you hold a diversified portfolio with a variety of different investments, it’s less likely that all of your investments will perform badly at the same time. The profits you earn on the investments that perform well, offset the losses on those that perform poorly. In a nutshell, the more diversified a portfolio, the more likely it is to grow in the long term.

What are the Benefits of Diversification of Investments?

The importance of diversifying a portfolio is to help limit exposure to significant losses in the market. In moments where the market is performing well and an investor is not receiving the returns they would like, it is important to remember that the purpose of diversification is not just to maximize returns but primarily to minimize potential losses.

Let’s understand why it’s important to diversify your investments:

To Mitigates Risks

Not all types of investments perform well at the same time. Different types of investments are affected differently by world events and changes in economic factors such as interest rates, exchange rates, and inflation rates. Diversification is an effective way to balance risk and reward in your portfolio. You can make changes to balance your portfolio gradually by adjusting different positions. This is a safer option than overhauling your entire portfolio in one hit and exposing yourself to greater market risk.

Maximise Returns

Effective Diversification has been proven to help investors avoid the worst of financial market ups and downs. With enough variety in your portfolio, you will usually own some investments that are in favor, even if some others are doing badly. The things that are doing well help cushion the blow of those that are falling.

Help Reach Your Financial Goals

Diversification will have a major impact on whether you reach your financial goals or not. Without diversification, you may not have enough opportunities in your portfolio to earn the returns you need to meet your goal.

Regardless of your goal, the time period, or your risk tolerance, a diversified portfolio is a foundation for a smart investment strategy. So it’s time to re-plan your investments and get the most out of them!
Source: https://wizely.in/wizeup/what-is-diversification-of-investments-26-why-should-you-do-it-3f.

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