Diversification is perhaps the most fundamental strategy of limiting risk. While some investments yield fantastic results, quite often, others do not. No investor or investment professional can predict future performance, rather we can only have reasonable expectations based upon past, present and future performance of the company’s business that is underlying a particular equity. To be sure, not every outcome matches your expectation – no matter how reasonable it is. Consequently, it is not prudent to place all of your investment funds into one company – or even one market sector. Through diversification, you spread the risk – and spread the opportunity.
Portfolio diversification should always be driven first and foremost by each investor’s objectives and risk tolerance. Some investors have a longer-term investment time horizon and can afford to be more aggressive and concentrated in their portfolio selection. Others rely on their investment portfolio for a percentage of current income and must invest with a more risk-averse strategy. But in all cases, diversification should be applied to building an investment portfolio.
It is important to note that diversification involves not only selecting different companies, but different sectors, companies of different sizes and even different investment vehicles such as stocks, bonds, CDs and real estate.
