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The Importance of Diversification |
by S. Wade Hansen
Diversification Offers Protection
Diversification is spreading out your investments across a large group of unrelated assets. In other words, diversifying your investments is like buying a blue shirt, a red shirt, a green shirt, a yellow shirt and an orange shirt instead of just buying five blue shirts.
Diversification protects you from unexpected losses in any one investment. For instance, if you put all of your money into one stock, and the price of that stock drops, you could lose a large percentage of your money. On the other hand, if you spread your money out among 10 different stocks, and the price of one of those stocks drops, you can offset your losses with your gains in the 9 other stocks that are doing well.
When you invest in stocks, you will find there are many different ways you can diversify your investments. You can use beta diversification to identify stocks that don't move in the same direction, sector diversification to identify stocks from unrelated sectors and market diversification to identify assets from unrelated markets.
Regardless of how you end up diversifying your account, the important thing is that you do so.
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