Diversification

In: Business and Management

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Diversification
A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Diversification strives to smooth out/reduces unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.
Advantages and disadvantages of diversification
Diversifying your investment portfolio can protect you from localized fall in the market, but it can also prevent you from making big money. The question of what breadth of diversification is appropriate is an ongoing conversation among financial professionals. Finding the right diversification level for yourself involves an analysis of your assets and your tolerance of risk.
Advantages
Risk reduction
When your assets are widely diversified, your portfolio tends to perform in a similar way to the market as a whole. If you own stocks in 20 different areas and one of them takes a dive, it's unlikely that your portfolio will suffer terribly. Diversification is the best way to increase the stability of your investments and decrease your risk of losing money in the event that a single area decreases in value. Although diversification won't protect you from general market slowdowns, it will maintain your portfolio's stability over time.
Asset choices
When your holdings are widely diversified, you can spread them out over widely divergent forms of assets, including securities such as stocks and bonds, commodities such as oil and minerals, real estate and cash. Each of these assets exhibits…...

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