Stay diversified to mitigate risk in your portfolio from "summary" of The Investment Answer by Gordon Murray,Daniel C. Goldie,Gordon S. Murray
Diversification is a fundamental principle in investing that is essential for managing risk in a portfolio. When you diversify your investments, you spread your money across different asset classes, such as stocks, bonds, and cash equivalents. This strategy helps to reduce the overall risk in your portfolio because it is unlikely that all of your investments will perform poorly at the same time. By staying diversified, you can protect yourself from the volatility of individual investments or sectors. This is because different types of assets tend to react differently to market conditions. For example, when stock prices are falling, bond prices may be rising, providing a buffer against losses in your portfolio. On the other hand, if you only invest in one type of asset and it performs poorly, your entire portfolio could suffer significant losses. Diversification is not just about spreading your investments across different asset classes; it also involves diversifying within each asset class. For example, if you invest in stocks, you should consider diversifying across different industries and geographic regions to further reduce risk. This way, you are not overly exposed to the performance of a single company or market. Maintaining a diversified portfolio requires regular monitoring and rebalancing to ensure that your asset allocation remains aligned with your investment goals and risk tolerance. As market conditions change, some investments may outperform while others underperform, leading to an imbalance in your portfolio. By rebalancing, you can sell assets that have performed well and buy assets that have lagged behind, bringing your portfolio back to its target allocation.- Diversification is a simple yet powerful strategy for managing risk in your portfolio. By spreading your investments across different asset classes and within each asset class, you can protect yourself from the ups and downs of the market and increase the likelihood of achieving your long-term financial goals.
