How diversification can save your portfolio

Diversification is a common word in the stock market, but some may not understand what it really means or how it serves them on their financial journey. Today, we’ll be breaking down this term to hopefully answer the questions you might have had when you first saw the title.

If you’ve heard people say, “Never put all your eggs in one basket," what they are really saying is “always diversify." Contrary to investing in a single stock, diversification involves buying a number of stocks to ensure that your portfolio is not solely tied to a single asset class, industry, risk level, or firm.

The rule of thumb in diversification is to invest in investments whose returns are not correlated with or affected by the same factors.

But why diversify?

There are a lot of reasons why it’s advisable that you diversify your portfolio, and one of them is mitigating risks. Keep in mind that diversification doesn’t free you from risk, it only allows you to reduce risks or losses.

So, let’s get practical.

Making a loss in the market is caused by different factors, some of which are beyond the control of investors. Factors that also vary across industries, asset classes, and so on. So spreading your money across different investments means that these factors affect your diversified investments differently.

As such, while one industry is experiencing a downturn, another company might be experiencing an upturn. Imagine investing all your money only in the industry experiencing a downturn; that could hurt your chances of building wealth. But having diversified into other industries experiencing an upturn, you’re able to blur out the loss from one class with the gain of the booming. Basically, you’re hedging against risk.

Just as it is for risk,? diversification lets you partake in different profit opportunities across industries, asset classes, and so on. This way, you don’t miss out on any upturn.

As stated earlier in this article, some risk factors are beyond the control of investors, but diversification is one tool investors can rely on to hedge against them. So when building your portfolio, always keep in mind that your investments shouldn’t be linked when it comes to factors that affect their returns.

Diversifying your investments can sometimes be easier said than done. However, if you want an easier way to diversify your portfolio, i-invest is one platform that provides you with a range of products that provide the opportunity for diversification and allow you to insure against various risk factors.