Putting all of your investments in one basket is not advisable when investing because it exposes you to a significant amount of risk. You can lose more money when something unfavorable happens to your focused investment.

What is Diversification?

Diversification is the strategy of spreading your investments across different asset classes, sectors, and geographic locations. This approach can help mitigate risk because if one investment underperforms, it's offset by the others in your portfolio.

Why Diversification is Important in Investing

By diversifying, you increase your chances of capturing returns from different areas of the economy while minimizing your overall risk. Ultimately, diversification is about managing risk and creating a balanced portfolio that aligns with your investment goals and risk tolerance.

How To Diversify Your Portfolio Properly?

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Having a well-diversified portfolio is crucial to overcome any market condition. Blending your investments in a portfolio can help you maintain the potential for growth and manage risks better.

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1) Sector Diversification

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Spreading your capital across different sectors helps you avoid crumbling completely in case one sector experiences a downturn. It may avoid risking your whole portfolio and spread your risk. Different sectors are technology, healthcare, energy, consumer goods, and finance.

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Source: Funds and ETFs (cnbc.com)

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2) Geographical Diversification

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Some people might focus solely on their home country’s market. Geographical diversification means you are able to invest in different regions across the world. This gives you an opportunity to reduce risk and increase potential returns especially when you are able to tap emerging markets or developed markets.

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3) Asset Class Diversification

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Diversifying the asset class you invest in means investing in different types like stocks, bonds, real estate, and commodities. Stocks, for example, may offer higher returns but are riskier than bonds, which typically offer lower returns but are less volatile.

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4) Time Diversification

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Time diversification gives you the opportunity to take advantage of market fluctuations. Invest consistently and do it for a long period of time to enjoy the power of compounding.

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Building a Diversified Portfolio

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Without taking diversification into consideration, an investor might be posing themselves with a huge loss or limited potential returns. Significant downturns in the market or asset type may cause a big impact on one’s portfolio.

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Review your investment goals, your risk tolerance, and time horizon. Determining your investment objectives will guide you on how to diversify your portfolio. Research and learn from the mistakes of others too.

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