Diversification refers to the means of effectively lowering your investing risk by putting your money into a wide range of various assets. A truly well diversified portfolio offers the benefits of lower amounts of risk than those that are simply invested into one or two asset classes or kinds of investments.
Everyone should engage in some amount of diversification, even if the individual proves to be one who is tolerant of risk. Those individuals who really fear the present day economic uncertainties and very real amounts of risk in the market place will perform better forms of diversification into more asset groups.
Mainstream diversification is always recommended by financial experts because of the common example of not placing all of your investment eggs into just a single basket. If you do have all eggs in the one basket and then drop the basket along the way, then they can all break.
The idea is that by placing each egg into its own individual basket, the odds of breaking all of the eggs declines significantly, even if one or several of them do get broken themselves. Portfolios that have not engaged in diversifying might have only one or two corporations’ stocks in them.
This proves to be a dangerous investment strategy, since no matter how good a company looks on paper, its stock could decline to as low as zero literally over night. The past few years of the financial collapse have taught many investors the extremely painful lesson that even once blue chip financial companies’ stock can decline to practically nothing as they spectacularly collapse.
Any financial expert will confidently state that portfolios made up of a dozen or two dozen varying stocks will have far less chance of plummeting. This becomes even more the case when you pick out stocks from a variety of types, industries, and market capitalization sizes of corporations.
Better diversifying in stocks would include some companies that are based in other countries. Diversifying does not simply stop with stocks. It steers investors into bonds, mutual funds, and money market funds as well. Though all of these different investments diversify you, they still leave you mostly exposed to the one currency of the U.S. dollar.
More thorough diversifying will put at least a portion of your investments into assets whose values are not solely expressed in terms of only the American currency.
This would include commodities, such as gold, silver, oil, and platinum in particular. Foreign currencies, such as the Euro, Pound, or Swiss Franc are another fantastic means of diversifying, and they can be acquired on the world FOREX exchange in currency accounts.
Real estate, including commercial properties, residential properties, vacation homes, or even real estate investment funds, offers another way to diversify away from U.S. dollar based financial investments such as stocks, bonds, mutual funds, and money market accounts.
The strongest diversifying advice is to have at least three to seven completely different investment class vehicles, preferably one or more of which is not denominated in only U.S. dollars.