Library: Portfolio Building

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Diversified Investments

Diversification is a widely used strategy for investors who want to minimize risk to a certain degree. Diversified investments are investments that you spread over different market vehicles. Just like your mother or grandmother who told you not to put all your eggs in one basket, diversification is intelligently spreading your assets around in order to reduce risk.

This in turn spreads your risk and if one industry gives you a loss, the other might make you profitable. For example, investing $10,000 in the stock market in the technology sector is not diversification. Alternatively, investing 50% of that in the technology sector and the other 50% in the health care sector will diversify your portfolio, but not highly.

Some Examples of Diversified Investments

A good example of diversified investments is a Mutual Fund which usually takes your money, places 70% of it in stocks (different stocks/industries), 20% in other types of investments such as bonds, and the remaining 10% in cash.

Another way to achieve diversification is by spreading out investments around the globe. Many investors will keep the bulk of their assets in North America, but also invest in emerging markets like China, India and Brazil. That way, they are protected against big losses in any one market and can get exposure to quickly growing new markets.

Finally, diversified investments can be achieved by market capitalization (market cap). Large cap stocks fill the majority of a portfolio while mid-cap stocks and small cap stocks make up the remainder. This way, a portfolio can enjoy the protection of having stocks of all different sizes.

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