Diversification is key to reducing risk in an investment portfolio from "summary" of The Little Book of Behavioral Investing by James Montier
One of the most important principles in investing is the idea that diversification is essential for reducing risk in a portfolio. By spreading your investments across a variety of different assets, you can protect yourself from the volatility of any one particular investment. This principle is often summed up in the phrase, "Don't put all your eggs in one basket."When you diversify your portfolio, you are essentially hedging your bets. By not concentrating all your investments in one asset or sector, you are less exposed to the risk of a single investment going sour. This can help smooth out the ups and downs of the market and reduce the overall volatility of your portfolio. Diversification can take many forms. You can diversify by asset class, such as holding a mix of stocks, bonds, and real estate. You can also diversify by geographic region, industry sector, or market capitalization. The key is to make sure that your investments are not all tied to the same economic factors or events. One common mistake that investors make is thinking they are diversified when they are actually not. For example, if you hold a large number of different stocks in the same industry, you may think you are diversified, but in reality, you are still exposed to the risks of that particular sector. True diversification requires spreading your investments across a range of different factors that are not highly correlated with each other.- The goal of diversification is to build a portfolio that can weather the storms of the market and provide consistent returns over the long term. By spreading your investments across a variety of different assets, you can reduce the overall risk of your portfolio and increase your chances of achieving your investment goals.
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