What is portfolio diversification?

When it comes to investing, portfolio diversification is a must for each and every one. It involves spreading investments in various sectors so as to avoid overexposure to a single risky asset. The purpose is to make your investment portfolio less volatile over time.

The underpinning of portfolio diversification is the fact that not all classes of investment assets move together in response to market forces. When you have a wide variety of assets, you can avoid or totally eliminate risk from your investment portfolio.

However, it isn’t just about investing in different assets. Rather, it also has to do with spreading your investments across companies and industries. Thus you will be able to minimise the risk involved in trading in socks of a given company or industry.

When you invest in assets with little or no correlation, it can help reduce the likely losses resulting from a bear market. Thus you will be able to preserve capital for future investment in a bull market. In fact, one of the roles of diversification includes optimising your portfolio.

Ask your local financial adviser which risk assets you need to invest in now, without risking losing your entire investment. After all, when it comes to investment, there is no other free ride but diversification.

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