INTRODUCTION:

Investment Portfolio Diversification:

One proven way to spread risk comfortably throughout our portfolio is to make sure we
sufficiently diversify our investments.

Investment portfolio diversification is a tried and tested technique that involves reducing risk by
spreading investments across a varying range of companies, sectors, geographical locations and
assets. Obviously, diversifying our investments is not an absolute buffer against financial losses.
However, it remains a vital strategy for minimizing risk that often helps investors to achieve
their financial goals.

 Why does investment portfolio improve chances of growth and success?

An investment portfolio containing investments with little or no relation to each other, also
known as low correlation, is in less danger of being heavily impacted upon by negative value
fluctuations in any one company, sector, country or asset. Diversifying our investment portfolio
often enables falls in the value of one investment to be cushioned by rises in the value of
another unrelated investment.

Key Ways:
Here are the key ways we can diversify our investment portfolio:

 Diversify Our Company Investments:

It’s obviously common sense not to invest all money into a single company. Little is certain in
the current economic climate and even the most prosperous of companies can suffer a fall in
value or even fold. Always spread our investments across a number of companies and consider
investing in companies that operate in different market sectors. It’s vital to conduct thorough
research into any company we are interested in investing in and to seek the advice of an
independent financial advisor prior to making a final decision.

 Diversify Our Sector Investments:

Investing in a range of different sectors brings the same advantages as investing in different
companies. In the current economic climate there have been peaks and troughs in a wide range
of sectors. To provide a cushion with our investment portfolio against our entire portfolio losing
value, spread our investments across sectors with low correlation. For example, if our
investment in a company within the education sector suddenly experiences a dip in value, a rise
in our gold investment could compensate for it.

 Diversify the Geographical Locations of Our

Investments:
A good way to minimize the effect of stock market movements is to spread our investments
across different countries and separate regions. It’s quite a risk to place all our faith in the
economic stability of a single country and the financial policies of its ruling government. Again,
it’s crucial to conduct research into the stock markets of different countries and get expert
advice from an independent financial advisor before making any investment decision. Calculate
the risk involved before choosing to invest abroad, as some less developed markets are more
volatile than others and can be affected by systemic risks. Get as much information together as
we can while planning and building our investment portfolio with our financial advisor.

 Diversify Our Assets:

It’s wise to have a good mix of varying asset types within our investment portfolio, as it spreads
risk. There are many different types of assets, the primary types being shares and bonds, which
often have a low correlation to each other. Discuss with our independent financial advisor the
best way to mix the asset types within our investment portfolio. They will have the market
knowledge required to spread the risk throughout our portfolio. We should decide the level of
risk we are willing to take according to our financial goals. Are we near the time we want to
draw upon our invested money? Then go for lesser risks. If we are planning a long term
investment strategy, we may feel inclined to take greater risks. Remember to work with our
financial advisor to create a portfolio tailored to our personal financial goals.

 Avoid Over Diversification:

While diversification can protect our investment portfolio from value fluctuations in correlated
investments, over diversification can lead to us not having enough invested money in a
company or sector to truly benefit from any growth. Again, it’s a case of planning our
investment portfolio carefully with our financial advisor and striking the right balance.
 Advantages and Disadvantages of a Diversified
Portfolio:
 Risk Reduction:
When our assets are widely diversified, our portfolio tends to perform in a similar
way to the market as a whole. I we own stocks in 20 different areas and one of them
takes a dive, it's unlikely that our portfolio will suffer terribly. Diversification is the
best way to increase the stability of our investments and decrease our risk of losing
money in the event that a single area decreases in value. Although diversification
won't protect us from general market slowdowns, it will maintain our portfolio's
stability over time.

 Asset Choices:
When our holdings are widely diversified, we can spread them out over widely
divergent forms of assets, including securities such as stocks and bonds, commodities
such as oil and minerals, real estate and cash. Each of these assets exhibits different
strengths and weaknesses in terms of risk and profitability. Maintaining holdings in all
of these areas helps to create a stable portfolio that will increase in value over the
long term.

 Lower Maintenance:
Investments require a certain amount of care and attention to keep them performing
well. If we are playing high-stakes games with our assets and moving them around
through risky ventures, we will probably be spending a fair amount of time watching
the markets and dodging financial bullets. A diversified portfolio is less exciting and
more stable. Once we have our investments settled into a wide variety of stocks and
securities, they can remain there for extended periods without requiring a lot of
maintenance. This frees up our time to pursue other matters and reduces the market
stress that may lead to burnout.

 Increased Exposure:
When our holdings are widely diversified, we will suffer some amount of loss
whenever some part of our portfolio dips in value. If the market as a whole is
declining, it is very likely that at least a portion of our holdings will do the same.
When we diversify our investments, we protect our self from excessive financial
exposure, but we also increase the risk that some part of our portfolio will be
declining at any given time.
Why Is Diversification a Good Thing for Our Investments?
Diversification is one of the most important qualities of our investment portfolio, according
to the U.S. Securities and Exchange Commission. Diversification means, simply, spreading our
risk among several different types of investments. Investing all of our money in only stocks
or in one mutual fund is the opposite of diversification. Diversification is the first step in
managing our investment portfolio, but when done correctly, the process has several steps
and continues throughout our investment life. Benefits of diversification develop over time .

 Managing Risk:
Nolo reports that professional financial advisors remind investors not to place all of their
eggs in one basket, which concentrates risk in one area. Diversification allows we take a
risk in some investments while assuming less risk in others. We might lose some of our
money, but not all. According to the U.S. Securities and Exchange Commission, cash and
cash investments, such as money market funds, have the least risk and the lowest return
among the most common types of investments. Bonds are higher risk with more return
on investment, generally. Stocks have the highest risk and potential return as an
investment choice. Real estate and commodities have varying degrees of risk. Some
mutual funds provide diversification by investing pooled money in collections of many
different investment vehicles, though some focus only on a particular industry.

 Achieving Financial Goals:

Diversification combined with asset allocation helps we set and achieve our financial
goals. We base our asset allocation within our diversified portfolio on the length of
time we need to realize a financial goal and our ability to tolerate risk. For instance,
we might allocate more of our investment funds to riskier investments when we are
in our 20s, but move the bulk of our money to more conservative investments when
we are nearer retirement age, or a low-risk weighting of asset allocation choices
could help to protect our initial investment when saving for a child’s education.