Diversification for New Investors

If you are a new investor, the subject of diversification might be confusing for you. If you are planning on being successful in the investment world, you will need to understand how diversification works and how it can benefit you.

Importance of Diversification

Diversification is an investment strategy where you invest in many different securities that are uncorrelated. By using diversification, you will be able to overcome poor performance by individual securities. For example, if you invest all of your money into one stock, your success depends on the success of that particular company. By comparison, if you were to invest half of your money into one company and half into another, your success would not depend on one company as much. As you continue to diversify, the overall risk of your portfolio decreases.

Areas to Diversify

It is important to use diversification in a number of different areas. You will need to diversify your portfolio among several different assets. For example, you might want to invest in some stocks, some bonds, and some mutual funds. You also need to choose investments with varying degrees of risk.

When choosing investments, you will also want to diversify your portfolio over several different industries. This will make it possible to withstand down periods in one sector of the market. 

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