Diversity of Investment

 Diversity of Investment

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“Don’t put all your eggs in one basket”, goes the old adage. Based on your goals you may have allocated your investment into various asset classes such as equities, fixed income, insurance and commodities. But if you do not diversify within each asset class, the exercise, according to analysts, is sub-optimal.

Portfolio Diversification

Portfolio diversification concerns with the inclusion of different investment vehicles with a variety of features. However, the strategy can bring benefits to an investor only if the investments included in the portfolio include a small correlation with each other. A small correlation indicates that the prices of the investments are not likely to move in one direction.

There is no consensus regarding the perfect amount of the diversification. In theory, an investor may continue diversifying his/her portfolio if there are available investments in the market that are not perfectly correlated with other investments in the portfolio.

An investor should consider diversifying his/her portfolio based on the following specifications:

Types of Investments:

Include different asset classes such as cash, stocks, bonds, ETFs, options, etc.

Risk levels: The portfolio generally should consist of the investments with minimal levels of risk. Investments with dissimilar levels of risks allow the smoothing of the gains and losses.

Industries: Invest in companies from distinct industries. The stocks of companies operating in different industries tend to show a lower correlation with each other.

Foreign Markets: An investor should not invest only in domestic markets. There is a high probability that the financial products traded in foreign markets are less correlated with the products traded in the domestic markets.

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