The 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.