You might be familiar with the following phrase: “Don’t put all your eggs in one basket”.
Through the lens of investment management, it is the principle of wealth creation, risk reduction, and portfolio management.
What is Diversification?
Diversification involves owning different investment assets.
For example, we identified the major asset classes as equities, bonds, commodities, and real estate. Purchasing investments in these different asset classes is diversification!
It would be inherently risky to solely own stocks in a portfolio – imagine if the value of stocks in your portfolio decreased by 50% – Yikes!
To account for uncertain circumstances, diversification is a critical component to reducing risk – but more importantly allows an investor to generate higher returns by accessing different sources of return.
We certainly cannot predict the future, but diversifying your investments can help you plan for it.