The Basics of Diversification

Most of what we hear deems diversification of portfolio as positive, as it reduces the level of risks, many are still unfamiliar of what it really is about and how it works. Most people just like the idea of having an evenly distributed grouping of their financial assets, since they often overhear that it can possibly increase investment returns. However, there is a lot more to it than that, which is necessary that all investors are aware of. Below are some initial information you should familiarize yourself with regarding this strategy.

How do you diversify your portfolio?

  • Possession of more than a single stock in one company

  • Acquiring stocks in various industries

  • Investing in additional market categories

  • Own stocks of varying capitalizations

  • Venturing out of domestic stocks and investing globally

  • Exploring different assets as you raise your investments

As you can see, there are numerous ways you can spread out your holdings. But the real question here is to what extent do you have to do it? To answer this follow up query, first you need to know about the advantages and disadvantages of a diversified portfolio and get a background on how a concentrated one works.

Diversification pros

  • It decreases risk potential and volatility

  • It can soften the blow of losses in case a group of stocks are performing poorly, since another may be doing well.

  • It provides additional profit opportunities through foreign investments.

Diversification cons

  • A portfolio, if overly distributed, may result to gains ranging from low to average.

  • It may burden your budget since it requires additional transaction fees to maintain balance.

  • It is also harder to monitor since the investor is required to be updated of several differing investments.

  • In some cases it can cause risks if the owner keeps on adding investing in companies or assets without knowledge about it.

Concentrated portfolios

The main benefit of focusing on one asset category is although it poses greater risks, it will also provide you with highly satisfying rewards. It also allows the investor to fully devote his focus and time in managing his chosen areas of investment.

Overall, it would be best to go for a moderately diversified compilation of your holdings. While doing this, select where your primary focus will be, but your priority should always be on producing a portfolio in which the combinations meet not just your financial needs, but also your personal goals.