Diversification
Explanation: Diversification is an investment strategy that involves spreading your investments across various asset classes, industries, and geographical regions to reduce risk. By diversifying your portfolio, you mitigate the impact of poor performance in any single investment, enhancing the overall stability and potential returns of your investments.
Example: Instead of investing all your money in technology stocks, you diversify by investing in a mix of stocks, bonds, real estate, and international assets. This way, if the technology sector underperforms, your losses are offset by gains in other areas.
Reference Link: For more information on diversification, visit Investopedia’s Diversification.
FAQs:
- Why is diversification important?
- It reduces the risk of significant losses by spreading investments across different asset classes and sectors.
- How do I diversify my investment portfolio?
- Invest in a mix of asset classes, such as stocks, bonds, real estate, and international assets, and consider using mutual funds or ETFs for broad exposure.
- Can diversification guarantee a profit?
- No, diversification cannot guarantee a profit, but it can reduce the risk of substantial losses.
- Is there a downside to diversification?
- Over-diversification can dilute returns, and managing a highly diversified portfolio can be complex and time-consuming.
- How often should I review my diversified portfolio?
- Regularly, at least annually, to ensure your asset allocation aligns with your financial goals and risk tolerance.