Diversification is a technique of spreading investment capital across various types of assets as well as within individual asset classes. The idea is to limit exposure to any single asset or category, which mitigates risk in the event that one of them experiences a significant loss in value.
How should investors diversify?
An example of diversification in an investment portfolio could be when you own a mix of stocks, bonds, bank certificates of deposits, commodities, and real estate. That gives you a variety of asset classes. You can diversify further within each asset class. For instance, in the stocks portion of your portfolio, you may buy shares in numerous companies across different industries, countries, market capitalisations, and risk levels.
Why should investors diversify?
As the adage goes: “Don’t put all your eggs in one basket." We do not want to put all our money into a single company or...