What is Diversification?
To diversify means to invest in more than one investment. You don’t want to put all your eggs in one basket. Diversification is a big part of successful investment because it reduces risk, a big part of investing.
When you invest in a corporation, you are taking a risk. You are taking a chance that the value of that stock will go down. You don’t want it to go down, but it’s very possible. Even with bonds you get that risk that they may not pay you back.
As bad as risk sounds, it’s vital to make money through investing. The more risk you are taking, the more likely you are either to make more money or lose more money. The risk that you add by not diversifying is careless risk that does not really increase the amount you can make. Don’t invest all in one investment. If you have a lot of money invested, you will feel it even more.
Let’s say you invest $1,000 into stock of one company and they go bankrupt. You’d probably lose a thousand dollars. If you had invested $1,000,000, you’d lose that much more.
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No matter how much you are investing, make sure you diversify. If you invest a lot more, you’ll feel it a lot more, but you should diversify just the same.
The way you diversify is also affected by your age and how long you have until you retire. As you get closer to retirement, more money should be invested into bonds. You are close to retire and will need the money soon, so you don’t want to lose that money.
If you are younger such as in your 20s or 30s, invest more of your money into the stock market. You can afford to, and should, invest more in investments that are riskier. Make a balance wherever you are.
If you are unsure how to diversify your money, you can invest in mutual funds. A mutual fund is diversified as is because it includes many investments to begin with. If you want to further diversify, you could choose to invest in a bond mutual fund and a stock mutual fund or in different industry mutual funds.
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