Importance of Portfolio Diversification

Importance of Portfolio Diversification | Insights Success

Investing through portfolio diversification is a tried and tested method of yielding good returns while minimizing the overall risk associated with different types of financial assets, geographical locations, sectors, individual company among others. Definitely, diversifying your portfolio is not an absolute buffer against financial losses but it is a popular and vital technique to help investors achieve their financial goals while minimizing their investment risk. It’s a smart and modern-day investing technique that also does risk-management to assist the investors yield a promising and lucrative returns over a period of extended time.

Here are the key benefits of portfolio diversification:

Minimize the Investment Risk:

“Don’t place all your eggs in one bucket,” is a popular proverb as unexpected and unfortunate drop of your bucket can break all the eggs and lead to significant loss. While placing each egg in different basket makes your eggs more diversified and a sudden drop of one or two baskets do not affect the condition of other eggs placed in diverse baskets.  This proverb carries the true reflection of what one can lose in an extreme scenario if invests into one single financial asset like stock that too for a single organization.

Similarly, if we take a classic example of financial sector where a person has invested in a single stock and due to some catastrophe that stock went down by 50% in one year, definitely it will give that person a heartbreak. But if that same person had invested in multiple stocks, chances of him to experience a 50% loss in average would have not been possible. Therefore, investing in diversified portfolio can better manage your risk of losing more money in case of any unfortunate market catastrophe as compared to investing into a single financial asset.

Yield Higher Investment Returns (on Average):

None holds a crystal ball that can show in advance which stock can return exact what percentage of return after a certain period of time. But investing in different types of financial assets like bonds, stocks, commodities, mutual funds among others can significantly increase the chances of higher and safer returns as compared to investing in a single financial asset. Since, at some point of time some shares can went down but it is highly impossible that all types of financial assets in your portfolio can go down for a longer period of time. Importantly, rate-of-return in all these types of financial assets are varying to many percentages points, and also these assets on your portfolio varied in terms of sectors, countries, companies, geographical locations among others, so you can also reap the benefits of all by diversifying your portfolio and earn handsome profits in all weathers.

Provides Good Experience to the Investor:

People make investment to get reasonable profit from it. But, will most of them continue if they incur significant losses? Definitely not. Thus, a good investing experience is must to continue long in this dynamic and volatile market.

Investment return in a diversified portfolio, definitely can never exceed that of the top performing asset but its returns are always better than that of the worst performing assets. Therefore, it at least guarantees a much safer and reasonable return in all weather and gives a good experience to an investor rather than a complete heartbreak in case of market crash. And thus, it also encourages people to get involve in the investment process for a longer period of time.

While investing in diversified portfolio can protect your money from value fluctuations but over diversification can also hinder your growth prospect. Therefore, plan your investment portfolio meticulously with the assistance of your financial advisor and strike a right balance for a realistic and reasonable growth.

Ashwini Deshmukh