Why diversification is important while investing

There is an old saying “Don’t put all your eggs in one Basket’ and this holds true even with respect to stock market and personal finance.Diversification is a basic rule which needs to be followed during investing.Diversification here means investing your money in different instruments and minimizing your risks. All those instruments might not be related to stock market.

For example…Investing some of your money in gold,investing some of your money to buy some property, and putting rest of it in the stock market.So even if one of the option do not work well,you will atleast have other things.

instruments for diversifying your investments

Some of the instruments for diversifying your investments

Now the question is how should you allot your money.That needs to be carefully thought over by you considering your risk profile.

Diversification in your stock portfolio helps you in protecting your money against the market fluctuation. So for example if the stocks in Pharma sector are not doing well then the stocks in some other sector in your portfolio might be performing well. Infact diversification is a must rule to follow in Portfolio management.

Diversification protects you from risks associated with your investments and makes sure you do not loose all your money.

We will try to look at with an example – You have invested all your money in buying Gold (No diversification) and you expect the prices to go up in near future.However the expected did not happen and due to some unprecedented events the price of gold hits the rock bottom resulting in a big loss for you.

Consider the same scenario again – If you had invested only a chunk of your investment in Gold (10% – 15%) and invested the rest of amount in some other instruments you would not have suffered such heavy losses.

If you think about it logically diversification will be the first natural thing which will come your mind while investing your money.

4 Responses to Why diversification is important while investing

  1. Narasimham says:

    This blog is very informative and quite educative particularly for beginners.Could u please guide me as to when this stop loss is to be applied or it has to be applied every time in trading as a safe measure.Elaborate as to how these applications are to be maticulously used.

  2. sudhir says:

    very useful information thanks especially short sell and diversification

  3. Rishabh Sharma says:

    By diversification, do you mean to invest in different stocks (all high risk high return types) or to invest in different investment areas itself (stocks, fd, etc) depending on their decreasing risks and returns?

    How do I decide what percent of my total investable income to invest in an area? Is there a thumb rule or a formula to determine this?

  4. Article Source says:

    Excellent post. I was checking continuously this weblog and I’m inspired! Very useful information particularly the final part :) I take care of such information a lot. I was looking for this certain information for a very long time. Thanks and best of luck.

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