- The term diversification means varied. Ideally an investment portfolio should contain a mixture of investment vehicles that will enable the investor to meet his financial goals within the desired time frame.
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An investor may invest in real estate by buying and selling houses. She may also buy houses and rent them out to tenants.
An investor may buy precious metals such as gold or silver. An investor may also invest in bonds or choose to invest in the stock market or stock markets in various countries. - One of the problems with any investment is the potential to lose money. If the price of a house you have purchased goes down and you need to sell, you may lose money on the deal. If a company goes bankrupt and you bought their stock, your company stock shares may be worthless.
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A well diversified portfolio can help reduce these risks.
For many investors a well diversified portfolio means investing in various industries and various kinds of stock. An investor may invest in the technology sector as well as medical and publishing stocks. Or an investor may invest in blue chip stocks as well as small cap stocks. - If you are in your early 20s and just starting to save for retirement, a diversified portfolio can also benefit you. You can choose to allocate only a part of your savings to a potentially risky venture such as a new startup company or overseas investment fund. Using diversification will ensure that your entire portfolio is not at risk.
- Another advantage of a diversified portfolio is that it increases the probability that you will have a steady stream of income. This can be important if you have short-term goals that must be met, like paying for your child's college education.
