Top Five Reasons to Diversify Your Portfolio

Reviewed: February 04, 2014
By FinanceWeb

There is a saying about life that goes, “Never put all of your eggs in one basket.” While there are plenty of applications for this in everyday life, perhaps the most relevant is when it comes to your investment portfolio. Having all of your money invested in one place can be tempting, especially if the proverbial basket seems like the safest one. But in reality, by not having a diversified portfolio, you could be putting yourself in a tough spot and missing out on big returns. Here are the Top 5 Reasons to Diversify Your Portfolio

1. Reduce Risk

In regards to investing “diversify” is just a fancy word for distributing your money into different industries, investment types, and categories. By investing money in unrelated industries, you have a reduced risk of loss because industry specific trends and events that negatively affect one investment will have no impact on another.

2. Hedge Your Bets

Bond and equity markets have a tendency to reacts to events in opposite ways. A market event that negatively impacts your bonds investments will usually increase the value of your equity investments. By diversifying your portfolio to include investments in both, you have a better chance of protecting yourself and your investment in an ever-changing market.

3. A Balancing Act

Often people are tempted to invest in the “safe” investments, especially people who have a long term plan for their money. This is not a bad idea in itself, but it misses out on the opportunity to capitalize on higher risk, higher return investments. By having a good balance of both high and low risk investments, you can protect your money without feeling like you are leaving cash on the table.

4. Different Assets, Different Risk

Often, when diversifying your investment portfolio, your money will be spread out between different asset classes. Having investments broken up between different asset classes is helpful because all asset classes respond differently to adverse market effects. By investing this way, you are helping to ensure your portfolio as a whole is less easily impacted by inevitable market fluctuations.

5. Hands Off Option Available

There are those who are very involved in their investments. Most people, though, are investing for a long run return like retirement and would mostly like to put their money in and sit back with fingers crossed. By having a diverse portfolio, these people can breathe a little easier, knowing that their money is working for them in the most effective way possible.

In an ever changing market, a diversified portfolio is more important than ever. It is the easiest and most effective way to reduce your overall risk while still maximizing return. There are plenty of options available for diversification, whether you want a hands off investment in a diversified fund, or a specific breakdown across industries you see with potential. Regardless of how or where you want to invest, a diversified portfolio is important for protecting yourself and your money.