The Importance of Diversification
When it comes to investing your money, diversification is important. Without it, you run the risk of losing everything if one investment, sector or market fails. Diversification offers some protection, ensuring that you do not lose everything in the case of some sort of catastrophe. Careful diversification of your assets is an important part of financial planning. If you want to reach your personal financial goals, you should understand the importance of diversification.
Diversifying the types of investments you have
One of the obvious ways to diversify your investments is to invest in different vehicles. A good mix of stocks, bonds and mutual funds can help your investment portfolio, as can adding safer investments. Although few people think of savings accounts and CDs as investments, that is what they are. You can diversify by investing in cash through an online savings account and with some careful CD laddering. Money market accounts and mutual funds can also be quite helpful in diversifying your investment portfolio to include cash investments. You can pad a nasty fall from riskier investments with safer investments. While cash investments will rarely earn as much as other investments, the fact of the matter is that they have yet to lose.
Diversifying within an investment category
Another way to diversify is to look into investment categories. Look at your stock investments. Are they all in technology? Are they are in pharmas? If you have all of your investments in one sector, you could be in trouble. If that sector crashes (remember the tech burst of the 90s?), then you lose a great deal. Make sure your stock portfolio is adequately diversified itself. That way you can gain a measure of protection against industry failures.
Likewise, check into mutual funds before you buy. The point of mutual funds is, of course, instant diversification, but some funds are more diverse than others. Look at the funds listed in potential mutual funds to make sure that you aren't choosing a mutual fund that is heavy in one particular sector. Be choosy about the purpose of the fund as well. There are some mutual funds known as "growth" funds. These are funds that invest in currently high-performing stocks, and are risky. Having a growth mutual fund should be balanced out with tamer, funds. These are sometimes referred to as "balanced" funds, full of companies that are tried-and-true. The earnings aren't as impressive most years, but they are less prone to sudden losses.
Diversify, diversify, diversify
When it comes to your investment portfolio, the importance of diversification cannot be overstated. Make sure you review your investments every year in order to determine what's working and what's not, and make changes accordingly. And make sure that you are adequately diversified to weather the storms and the losses that inevitably come with investing.
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