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Diversification reduces risk from "summary" of A Random Walk Down Wall Street by Burton Gordon Malkiel
The concept of diversification as a risk-reducing strategy is a fundamental principle in the world of investing. By spreading your investments across different asset classes, industries, and geographic regions, you can lower the overall risk of your portfolio. This is because different types of investments tend to perform differently under various market conditions. For example, when one sector is experiencing a downturn, another sector may be thriving. By holding a mix of assets, you can potentially offset losses in one area with gains in another. This helps to protect your portfolio from the impact of market volatility and economic fluctuations. Diversification is not just about spreading your investments across different types of assets. It also involves diversifying within asset classes. For instance, within the stock market, you can invest in a variety of companies with different market capitalizations, growth profiles, and industry exposures. This further reduces the risk of your portfolio being heavily impacted by the performance of a single stock or sector. It is important to note that diversification does not eliminate risk entirely. However, it does help to mitigate the impact of specific risks on your overall portfolio. By diversifying your investments, you are essentially reducing the correlation between different assets, which can lead to a smoother and more consistent performance over time.- Diversification allows you to spread your risk across a range of investments, rather than putting all your eggs in one basket. This approach can help you achieve a more stable and predictable return on your investments, while minimizing the potential for large losses. Ultimately, diversification is a key strategy for investors looking to build a resilient and well-balanced portfolio.
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