HomeHome SearchSearch MenuMenu Our productsOur products

Why diversification reduces your investment risk

by , 10 April 2015

Diversification is an essential aspect of portfolio management. By not putting all your eggs in one basket, you can reduce the risk you take on when investing.

So why does diversification work? And should you bother?

Read on to find out more…


What is diversification is all about?


The idea behind diversification is you spread your stock market risk by investing in a number of different securities. In doing this, you reduce the risk of investing in only one sector or share on the Johannesburg Stock Exchange.

Depending on the type of investor you are, you’ll have investments across different securities. For example, 60% in shares, 15% in property, 15% in bonds, 5% in gold and 5% in cash.

But you need to spread your risk further by ensuring you don’t invest too much in one specific security. And this is the whole premise behind diversification.

Let’s take a look at a simple example to illustrate how diversification works…


How diversification reduces your risk


Tim has all of his cash in stocks in the telecommunications sector. He has half in MTN shares and the other half in Telkom shares.

It’s clear that Tim hasn’t done much to offset risk. All of his cash is in one sector of the stock market.

His friend Mark is a bit different. He has his cash invested in eight different shares, which are across five different sectors. His holdings are in retailers, telecommunications, banks, industrials and gold miners.

By doing this, he has reduced his sector specific risk.

If something happened in the telecommunications sector that hit share prices hard, Tim’s portfolio would feel the effects. On the other hand, only a small portion of Mark’s share would suffer as a consequence.

Mark’s share portfolio would be in a much better position than Tim’s.

And that’s why you have to ensure you diversify your share portfolio.

So there you have it, why diversification reduces your investment risk.

*********** Best seller *************

Discover the ONLY trading lessons you’ll ever need to bank consistent gains of 60%, 75% and 93%

I’ve put together a book containing the most important trading lessons I’ve learn over the past 11 years. Lessons that have helped me make a consistent income trading the stock market!

This book holds the keys to help bank you gains of 60%, 75% and even 93%.

Arm yourself NOW with every trading strategy, lesson, trick and secret YOU need to start making gains of 60%, 75% and 93% over and over again!

*********************************



Why diversification reduces your investment risk
Rate this article    
Note: 5 of 1 vote

Have a trading or investing question? Click Here


Related articles



Related articles


Watch And Learn




Trending Topics