The Importance of Investment Diversification

“Don’t put all of your eggs in one basket!” You’ve probably heard that over and over again throughout your life…and when it comes to investing, it is very true.

Diversification is the key to successful investing. Most successful investors build portfolios that are widely diversified, and you should too!

Diversifying your investments might include purchasing various stocks in many different industries. It may include purchasing bonds, investing in money market accounts, or even in some real property. The key is to invest in several different areas – not just one.

In the interview below, Charlie Munger shares what is means to be diversified.

Over time, research has shown that investors who have diversified portfolios usually see more consistent and stable returns on their investments than those who just invest in one thing. By investing in several different markets, you will actually be at less risk also.

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Diversification lowers risk during market corrections

If you have invested all of your money in one stock, and that stock takes a significant plunge, you will most likely find that you have lost all of equity on paper.

On the other hand, if you have invested in ten different stocks, and nine are doing well while one plunges, you are still in reasonably good shape.

A good diversification will usually include stocks, bonds, real estate investment trusts, and cash.

Start with a simple even investment distribution

Experts also suggest that you spread your investment money evenly among your investments. In other words, if you start with $10,000 to invest, invest $2,500 in stocks, $2,500 in real property, $2,500 in bonds, and put $2,500 in an interest bearing savings account.

In Closing

It may take time to diversify your portfolio but it is worth the effort. You’ll benefit from lower volatility and a higher return on your investments.

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