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Samir 1

Diversification

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Hi Samir, thanks for coming here.

Diversification is a term that is closely associated with risk management. What this basically means is that a certain group of investors believes that you shouldn’t invest all funds into one asset, or the same group of assets, but rather spread your investments across the asset class to minimize the risk. 

Therefore, your portfolio should be diversified on a range of investments in order to reduce risk. Let me give you an example. 

If you want to invest $100,000 in the stock market, this theory tells you to diversify your portfolio and buy some bonds, stocks, currency, commodities etc. In addition, if you buy stocks, don’t make all of your investments in the tech sector. For instance, you should invest one part in tech stocks, another in food stocks, pharma stocks etc. This way, you are better protected. 

Diversification can be done: by asset class, by markets and regions, and different management styles. 

Diversification by asset class is a very popular model. As said in our example, you should spread investments across different classes, markets, and regions. Moreover, you can further diversify by investing in assets with a different rate of return.

This is also where the rebalancing of portfolios comes into play. Depending on the performance of portfolio categories, you may want to increase the weight on a certain category (e.g. stocks) at the expense of another one (e.g. gold). If you feel that the risk-off trading environment is now active, then you will rebalance by selling some stocks to buy safe-haven assets, such as gold. 

Diversification by markets and regions is when you diversify in geographical context e.g. buying assets in different regions, markets, currencies etc. Finally, some investors may look at the different CEO management styles and not put all their eggs in companies that, for instance, have CEOs at the helm that are implementing an aggressive strategy. 


 

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Hi Samir,

Investing is a risky and challenging undertaking, no matter which investment vehicle you choose. The best way to cushion yourself against risks is by diversifying your portfolio. Additionally, diversification will give you higher returns from your investments. Proper diversification is crucial, both in terms of yields and peace of mind. 
Tips on diversifying your portfolio
•    Diversify early on
 Instead of reacting to market behavior and rushing to invest in panic mode, make plans to invest when there is no rush. This way, you can think rationally and make the right choices.
•    Do not hold too many investments
Over diversification leads to a decrease in benefits once you have more than 20 securities. This is because you will have your money in many small investments. Additionally, the costs involved in investing in many diverse securities are high, given the carrying and transaction costs that come with each investment you choose.
•    You don't have to go big all at once.
It would be best if you increase your investments regularly in small doses. Using this strategy, you'll buy more shares when prices are low and fewer when prices are high. This is in contrast to investing heavily all at once when prices are high.
•    Regularly re-balance
Re-balancing is crucial to maintain an ideal portfolio. This also ensures you have a portfolio that reflects the target mix you initially had in mind. This could mean selling some of the assets you hold to buy more of others that work towards meeting your original goal. You should keep learning what is happening in the market to adjust your investments accordingly.
In conclusion, portfolio diversification is something you can learn with time. Just keep the above tips in mind so that diversification works to mitigate your losses and not to leave you with poor investment choices. 
 

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