Understanding Diversification
"Don't put all your eggs in one basket." This age-old saying holds true in the world of investments, and that's where diversification comes in.
Diversification is the process of spreading your investments across different asset classes. Why? To mitigate risk! When one investment underperforms, another may flourish, ultimately increasing overall returns and fortifying your portfolio against market volatility.
Let's talk about the two primary types of risk:
1?? Systematic risk: This affects all asset classes, such as fluctuations in interest rates or inflation. Unfortunately, it's a risk that cannot be diversified away entirely.
2?? Unsystematic risk: This risk is specific to individual asset classes, like a struggling company or an underperforming sector. The good news is that by investing in a diverse range of assets, you can minimize unsystematic risk and its potential impact on your portfolio.
Thorough research is always crucial to understanding the risks associated with different assets and identifying factors that cannot be diversified.
Embracing diversification could unlock the potential for a resilient investment journey!