The goal of diversification is to maximise return through investing in different areas which react differently to same event. In order for investors to conserve their portfolios against risk, they use the technique of diversifying their portfolio, this will ensure protection and security on their investments. Ever heard of the saying “don’t put all your eggs in one basket”? Well this is the same idea. When one invests in many different fields it lessens his chances of loss, if one investment fails the rest will protect his portfolio.
Diversification is a great method for someone looking to diminish risk on long term investments. This is done by investing in more than one kind of asset, such as stocks, commodities, foreign exchange and cryptocurrencies to add to the portfolio.
The idea is to invest in various different assets that are not necessarily correlated with each other. The concept is to pick different asset types ,which obtain different cycles and lifetimes, this way it will minimise the collision of any bad conditions that could negatively affect one’s investment.
A perfect example would be the current situation on the markets. As 2018 came close to an end, the markets came toppeling down with it. Let’s take a closer look at Apple, the asset that reached the 1 trillion mark only 6 months ago in August 2018. The stock hit its highest mark in October 2018, and has been on an ongoing downhill ever since. Such movement can be found on the Amazon stock too. The asset has been on an incredible rise since the beginning of 2018, reaching its highest point at the beginning of September, but suffered a huge drop of 14% in just 2 days, and has not managed to recover since.
However, if you take a look into commodities, Gold for example, the asset has taken the complete opposite movement to the stock market, suffering a large drop during 2018, but as of October, Gold has taken an incredible turn and is on a consistent rise.
Such a situation would be horrific for one who was only invested in stocks. The leading asset in each market usually decides the movement for the rest, and when one goes down, most likely all will. Diversifying is an extremely common act among investors for this exact reason. Rarely do traders with all their savings invested in one area survive from such falls, and it seems rather foolish to take such risks on a market that can turn around in a matter of seconds just from a couple words from someone with an affect.
Being a successful trader is all about thinking smart, being cautious, and planning ahead.
Diversity plays the main role in that, and although it doesn’t necessarily lessen risk in your multiple investments, it sure does save you from losing all in case of a drop in one certain market.