Why & How to Diversify Your Portfolio?

Diversification is an investment option to limit the exposure to any particular asset class or investment. Diversification reduces the risk associated with your investment portfolio. It helps you to yield higher returns along with reducing the risk in your portfolio. Taking a large exposure in high-risk instruments near retirement could erode the value of your portfolio. Hence, it is important to balance the risk and reward in your portfolio so that you don’t lose sleep on market ups and downs.   

·   Why is diversification important?

Let’s know why diversification is actually important. Diversification is important because

different investment options react differently to the same development or move in a different

pattern. Diversification helps to minimize the risks associated with your portfolio. Let us assume

that two years ago, you had invested your entire savings in one stock. Now, if that company goes

bankrupt or their performance suffers then your investment will suffer too. Would you be

comfortable in that kind of scenario? No. You will be more stressed in that situation.

But if you had diversified your portfolio and invested in a few other companies rather than taking

100% exposure in one particular stock you will be less stressed. Diversification can help you

combine assets of different risk levels in your portfolio.

·       How to diversify your portfolio?

The nature of diversification depends on financial goals, time horizon and risk tolerance.

You should not invest only in one stock. You should spread your investments among different

asset classes: A diversified portfolio should include equities, debt and cash. It is because different

investments come with different risks and returns. As different funds and stocks come with

varying risks thus minimizes the risks. Higher the returns, higher will be the risk and vice versa.

 ·       How diversification can help reduce the impact of market volatility

The primary goal of Diversification is to limit the impact of volatility on a portfolio. Changing the

asset allocation slightly, tightened the range of those swings without giving up too much in the

way of long-term performance.  Diversification ensures that by not putting all your money in one

stock will surely reduce unwanted risk to your capital. Diversifying your stock portfolio is

important because it keeps any part of your investment assets from being too heavily weighted

toward one company or sector. You can spread your money in stocks, bonds, cash, real estate, gold,

and other commodities. And the best and most effective way to diversify your investments is

through mutual funds. When you spread your investments, you make it more likely that you

always have some stocks performing well at any given time.

 

Conclusion:-

The main steps of diversification is to spread your money among different asset categories, then

further allocate those funds within each category. A smart approach for individual investors is to

diversify using mutual funds. Because mutual funds are groups of stocks, you’ll automatically be

diversified to a certain degree. A financial advisor can better help you select mutual funds that fit

your desired risk and diversification level. Thank-you for reading this blog. Hope you find this

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