What Diversification Is, and Why It’s Important by John Mussi

If you’ve been looking into options for investment, you might have heard several mentions about diversification and its importance to making good investments. Unfortunately, if you’re not really sure what diversification is or how to go about it, you might end up missing out on one of the best tools that you can have for making sound investments that are better protected against the fluctuations of the stock market.

The information below is designed to give you a better understanding of what diversification is, why it should be important to you and your investments, and simply ways that you can diversify your stock portfolio.

Defining Diversification

The first step to creating a diversified stock portfolio is understanding exactly what diversification is. In essence, diversification is the process of purchasing stocks, bonds, and other investments from a variety of different companies and funds so that you have a representation of different industries and market sectors in your stock portfolio.

This diversity of stocks and other investments allows you to not worry as much about individual stocks and how they perform, because your overall investment portfolio will not be as negatively affected by the fluctuations of specific investments.

A Well-Rounded Portfolio

In order to create a diverse portfolio, it’s important that you take a moment to understand the way that the stock market is divided into different sectors and industries so that you can make investments in a variety of them. Different types of businesses, such as biotechnologies or the lumber industry, will have stocks and other investment pieces that will fluctuate in value at different times. Often the drop in value of one particular sector will cause an increase in value in another sector.

By investing in a variety of these different sectors and industries, you’ll be able to ride these fluctuations with more ease because you’ll experience the increase in some sectors at the same time as the decrease in others.

Why You Should Diversify

Though you’re not required to diversify your investments, it’s generally recommended if you’re planning on making any serious long-term investments or are planning for retirement or wanting to supplement your savings. Diversification can not only help you to even out your investment experience and protect you from sector or industry-wide drops in value, but it can also set you up for the periodic increases in certain sectors or industries due to new discoveries or technologies that become available.

Like most things on the stock market, these sudden increases are usually temporary… but if you already have money invested in that industry or possibly even the company that’s leading the technological charge, you’re much more likely to make a lot of money and be able to sell your shares while prices are still high than someone who has invested after the fact.

Easy Diversification Methods

A variety of easy diversification methods exist, ranging from automatic diversification funds and mutual funds to taking the time to purchase various stocks individually from several different industries. Any good diversification plan will include several industrial indexes as well as investments in precious metals and a variety of well-performing stocks that have proven themselves to be stable over several years.

Take the time to research what is included in any diversification plan or mutual fund before making your initial investment, so that you can avoid any that are too closely grouped together… after all, you’re wanting to have a diverse grouping of investments to round out your portfolio as best you can.

You may freely reprint this article provided the following author’s biography (including the live URL link) remains intact:

About The Author

John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the www.directonlineloans.co.uk website.