Equity |
August 02The Importance of Diversification in Investments
“Do not put all your eggs in one basket” said Warren Buffett.
This statement by him makes complete sense as it is only
through the diversification of your investments that you can minimize the risk for
loss. It can be done by optimizing your returns through investment in different
types of asset classes such as equities, debt, cash, real estate, gold, etc.
1)
Diversification
is of vital importance while choosing a portfolio. The investment market sees constant
fluctuations that may be impossible to anticipate. Owing to
this situation, your portfolio should be diversified enough to compensate for
the losses that may be incurred due to a specific financial investment.
2)
When
investing in the equity market, you should focus on the diversification
of funds between companies as well as industries. This is because sometimes an
industry’s downfall can cause you losses. Investing in equity shares from
different industries will make sure that you can recover the losses caused due
to depletion of stocks of a particular industry.
3)
Risk
can never be eliminated completely as risk and reward are indivisibles. However,
you can reduce and manage risks efficiently to some extent by practicing diversification
in your investments. Diversification is a smart method of investment for
minimized risks.
4)
In
order to build a well-diversified portfolio, you need to set your goals first.
It is important to clearly define your financial needs and expectations from
the investment you plan to make. Secondly, you need to understand the features,
associated risks, degree, and frequency of returns of different asset classes
and financial instruments. Choose a combination of equity or other investment
options with an appropriate blend of risk and return to satisfy your financial needs
effectively.
Diversification
across different asset classes is the best way to make smart investments with
reduced risk. How do you diversify your investments? Let us know about your
views, queries, and suggestions of the best-performing ideas in the comments
below.