Diversification is important for successful investing. Like Warren Buffet says, “don’t place all your eggs into one basket.” Diversification is a technique used to reduce risk in your investment portfolio. The goal is to increase your odds of success. Essentially you want to diversify because specific markets could be volatile and unpredictable. Let’s say you invest only in banking stocks, such as JPM or BAC, and it is announced that there is a new law that hinders 50% of all bank revenue. This announcement will cause all the banking stocks to drop, which means your portfolio would suffer a significant loss. While if you are invested in multiple industries, your portfolio would hold strong, despite the drop in your banking stocks. Specific categories can suffer severe declines, although it is rare that two or three assets in different categories, will be affected at the same time.
Leave a Reply