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Why portfolio diversification is important?

The magic of portfolio diversification is that it helps you get through times of high uncertainty in the stock market. Diversification is the most crucial aspect of achieving long-term financial targets by minimising unsystematic risks while also ensuring a restful night’s sleep. Below are some of the useful tips to achieve portfolio diversification: 

  1. Don’t put all your eggs in one basket is an old cliche that most people are familiar with. The idea is that if a farmer trips while carrying the basket of eggs back from the henhouse, it might result in a disaster. Those wise words apply to farming and also to the concept of not risking all of your money on a single investment.
  2. Diversification is the process of spreading your money through various types of investments to increase your probability of a good return. In light of popular belief, diversification is a number’s game. It’s like implying, “Since no one knows who will win the race, let’s bet on everyone.”
  3. Diversification also aids risk management. Since different regions have different levels of growth facing different economic challenges, an international portfolio is an ideal portfolio. For example, stocks issued by non-UK companies often outperform their UK counterparts, giving investors access to opportunities not available via UK securities. Thus, If you’re searching for investments that offer both higher potential returns and higher risk, you may want to include some foreign stocks in your portfolio.

  4. Investing in a combination of stocks, bonds, real estate, cash equivalents, and commodities can be a good diversification strategy for many financial goals if your risk tolerance allows it. Dividing your investment portfolio among the best combination of these while ensuring that the risks are suitable for you is known as asset allocation which is a science in itself.

  5.  Investment funds are similar to a multipack of investments, but they are much cheaper and easier to purchase. Instead of paying a lot of money to buy them all individually, you can get a lot of them all at once. Funds will hold anywhere from a few hundred to several thousand assets, making them an excellent way to diversify your portfolio. However, you might argue that a fund is still a “basket” of investments and that investors should buy many of them to get even more diversification. The good news is that there are thousands to choose from, each with its special blend of global investments.

If diversification doesn’t seem to be your cup of tea and choosing stock sounds like a hassle, don’t worry we’ve got you covered. Irtiza Majeed’s investment portfolio on eToro comprises more than 140 global assets including the U.S., U.K., Europe., and the emerging markets. What’s better than having a well-diversified portfolio of assets all in one spot? Visit Irtiza Majeed’s portfolio on eToro to explore a well-diversified portfolio. 

This is not investment advice. As with all investing, your capital is at risk. Past performance is not a reliable indicator of future results.

 

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