Why Investment Diversification Matters

When you invest, many financial advisors recommend that you diversify your investments. But what does that mean exactly, diversify? Let’s take a look at diversification in more detail.

Diversification Basics

Diversification is an investment method that involves buying several different types of investments to reduce the risk connected with market volatility. The most common way to do this is to buy different stocks, bonds, and cash equivalents. By spreading your investments out, you are protecting yourself from too much risk in one asset class. 

Looking Deeper

Let’s say you decide to invest all of your money in IBM. IBM is a tech company, so that means you’re 100% invested in a stock in the tech sector. Now let’s say the price of computer chips suddenly changes, causing panic among tech sector investors, your IBM stock holdings drop. If you had diversified, instead of putting all your eggs in IBM’s basket, you may have suffered a smaller loss. 

The Reason

You want to diversify so that over time, you’re protected from risk and maximize your returns. If one asset plummets, maybe the other two skyrocket. Then, in five years, the reverse happens. Either way, you’re protected because you are diversified. The downside is that there are no huge swings, but over the long haul, diversification is usually the best way to make the market work for you.

Do One Thing: Make sure you diversify when investing; it’s a good call to mitigate risk.