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Diversification is key to managing risk from "summary" of Insights on Morgan Housel’s The Psychology of Money by Swift Reads
Diversification is a fundamental principle of investing that is often overlooked by many people. This concept essentially means spreading your investments across different assets to reduce the overall risk in your portfolio. By not putting all your eggs in one basket, you can protect yourself from the volatility of individual assets. This is because different assets tend to perform differently under various market conditions. For example, if you only invest in one stock and that company goes bankrupt, you could lose all your money. However, if you spread your investments across multiple stocks, bonds, real estate, and other assets, the impact of one asset underperforming is minimized. This way, you are not overly reliant on the success or failure of any single investment. Diversification can help smooth out the ups and downs of the market and provide a more stable return over the long term. It is a way to manage risk without sacrificing potential returns. While diversification may not eliminate all risk, it can certainly mitigate it to a certain extent. It is a strategy that has stood the test of time and is recommended by many financial experts.- You can build a more resilient portfolio that is better equipped to weather market fluctuations. It may not always generate the highest returns, but it can protect your wealth from significant losses. Ultimately, diversification is a key component of successful long-term investing.
