Why It Is Important to Diversify Your Investments
There are many experienced investors like Warren Buffett, who avoid stock diversification of the investments as they are in the confidence that they have performed all of the necessary research to identify and quantify their risk. They do so because they are comfortable to identify any potential perils that will cause danger to their position. They can easily liquidate their investments before taking a disastrous loss. Experts believe that one of the safest investment strategies is to put all of your eggs in one basket and watch the basket. But you must not forget that we are not experienced expert like them. So, especially in your first years of investing you must diversify your investments.
It is said that the popular way to manage risk is to diversify your investment. Be a cautious investor, who owns stocks of different companies in different industries and sometimes in different countries, with the expectation that a single bad event will not affect all of their holdings. Or if all holding is affected then surely they will be affected in different degrees. Suppose you own stocks in five different companies and each of which you expect to continually grow profits. But, regrettably, the situation gets altered.
You might have two companies (X & Y) that have performed well so their stocks are up 30% each at the end of the year. Another holding of two other companies (A & B) in a different industry is up 20% each. And fifth company’s (Z) assets were liquidated to pay off a massive lawsuit. This way, with the help of diversification, you can recover from the loss of your total investment. As in the example, even though your overall portfolio value dropped by 10%, it is considerably better than having been invested solely in company Z.
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