Diversification in Investment: When you start investing, you define your financial goals, risk preference, and time horizon of investment.
Based on these, you choose the asset classes that you want to invest in. Then comes the most important aspect of investing, creating a diversified investment portfolio. Most successful investors recommend diversified investments or portfolio diversification as the secret to generating wealth.
1.investment
2.Portfolio
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An investor might choose to invest in multiple asset classes like gold, real estate, equity, debt, etc. This decision is based on the definition of financial goals and the risk preference of the investor. The collection of all these investments (across all asset classes) is called an Investment Portfolio.
Diversification in Investment
Coming to investments, if you invest a major chunk of your money in a particular asset class, then you expose yourself to possible losses of the asset class. Hence, investment diversification is highly recommended as a hedge against losses due to overexposure to one asset class.
Summing up, when you invest, ensure that you diversify your investments and create a portfolio to monitor and manage them effectively. Such a portfolio is called a Diversified Investment Portfolio.
THE IMPORTANCE OF SAVINGS AND INVESTMENTS
There is no one-size fit approach in investments. Every investor is unique and requires a different investment diversification strategy to achieve his/her financial goals. The portfolio should be built by considering the financial goals and risk appetite of an individual investor Depending on how comfortable you are with determining the asset allocation it is advisable to consult an investment advisor. Some commonly used asset classes are:
Equity
Debt
Gold
Real Estate
Bonds
Crowdfunding, etc.
ust remember to diversify your investments optimally. Don’t try to invest in each of these asset classes. While a lack of diversification exposes you to too much risk, over-diversification makes it very difficult to monitor your investments and generate returns Hence, your diversified investment strategy must center on finding the right balance.
Benefits of a diversified investment portfolio
While portfolio diversification offers a plethora of benefits, here are the top three that cannot be ignored:
Minimizing risk – Let’s say that your investment portfolio has equity, debt, gold, and real estate. Now, if equity markets perform poorly, then the amount invested in those shares might pose a potential loss to your portfolio.
Diversification in Investment
However, being diversified ensures that one of the remaining asset classes will make enough returns to minimize the effect of a poorly performing asset class on your overall returns.
Capital Preservation – While some investors aspire for capital appreciation, capital preservation is equally important. Diversification allows you to protect your capital by allocating it to different asset classes.
Better returns – By diversifying your source of income and return you enhance your risk-adjusted returns.
