What are the main benefits of diversification?
Diversification is a kind of risk management strategy in which an investor mixes various number variety of investments within his investment portfolio.
When it comes to investment in the market, investing strategy matters a lot. Every trader in the stock market will have to deal with the various ups and downs happen in the market. To protect investment at the time of market downturn, an investor should use diversification.
Diversification is a kind of risk management strategy in which an investor mixes a large variety of investments within his investment portfolio. The main reason behind that a portfolio constructed of different kinds of investments will provide higher returns and balance risk in investment. An investor can refer expert's view, he can take stock tips and other market suggestions to get the right direction at the right time. It provides higher return with lower risk that a person hardly found in an individual investment portfolio.
There are two major reasons behind diversification, One is diversified portfolio has less risk as compared to individual portfolios and another one is it enables to add risky types of investments with the balance of overall risk level.
Major benefits of diversification -
1. It reduces the risk level - We cannot remove risk completely bus yes we can manage it properly. Each investment type has a particular amount of risk. Many investors view risk as an enemy because too much risk may spoil their future financial plannings. In fact, many senior citizens have faced huge losses in their retirement portfolios at the time of economic downturns. Diversification of income into safe assets may help the trader to reduce their risk as well as improve their market return. Using diversification as an investment strategy is the best risk management technique.
2. Conservation of capital - Investing in the wide range of assets is beneficial as compared to investing the capital into one or two investment assets. Balancing the portfolio with different types of stocks will help the trader to earn more return and limit the loss. Diversification makes easy to preserve capital by allocating money into different investment types. Capital preservation is a kind of investment strategy where an investor focuses on protection of capital rather their return on investment.
3. Less volatile in the overall portfolio - If the diversification is done by the investor properly, it enables less volatility in the overall portfolio. One key factor of this is to select assets that have fewer correlations. Suppose you have invested all your income in different companies but all belong in the same sector, so in this case, because if one company performed poor or good, maybe another one would automatically follow that same trend so it is better to invest in the unrelated investment assets. Like if one invested a part of the money in the stock market then he can also select forex market as other investment class or binary option is also a good option, he can refer forex tips or binary option trading tips for a higher return.
Diversification increases the potential return of the investor in the market also decreases their loss percentage.
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ABOUT THE AUTHOR
I am working as Associate financial consultant in Epic Research Limited-the leading advisory firm in India.I have good knowledge about stock market, so i used to write articles on the same.