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Proven Ways to Diversify Your Investments 09/18/14

Just as diversity of acquaintances and experiences can enrich everyday life for most people, diversification in the financial field can provide significant benefits for investors looking for stability in the modern securities marketplace. Most financial advisors recommend maintaining a balance of riskier investments and stable long-term earners as part of a comprehensive personal financial portfolio. Diversifying your holdings can provide added protection against downturns in a particular company or industry, in the general stock market and in the national and global economies.

Diversification Across Companies

Rather than investing your entire stake in one company, investment experts recommend making smaller investments in a variety of firms to limit your financial exposure. Entrusting too much of your investment capital in a single company can result in large-scale losses if that business experiences significant downturns or fails entirely. By diversifying your holdings across a range of different companies, you can avoid catastrophic losses in the event of a corporate failure and can enjoy added security for your hard-earned investment funds.

Diversification Across Industries

Downturns in particular industries may be prompted by reduced demand, limited material supplies and other events that can negatively impact earnings and profitability. Rather than investing solely in one industry or market sector, you can improve the overall performance of your portfolio over time and can reduce the risk of major losses within a single industry.

Diversification Within the Stock Market

Incorporating a mix of security types into your personal financial portfolio can provide you with added protection against unexpected market fluctuations. Some of the most common types of securities include the following:

• Certificates of deposit, also known as CDs, which offer fixed or variable interest rates if held for a specific length of time
• Corporate, municipal and government bonds
• Mutual fund investments
• Equity bonds
• Options to buy or sell securities
• Spot and forward contracts

Because each of these categories features its own unique set of risks and rewards, finding the right mix of security types can be a challenging undertaking for the novice investor. It is generally advisable to build in some hedges against various possible economic events; precious metals and government bonds, for example, are typically used to hedge against significant downturns in the stock market and can provide added stability for your portfolio.

Perhaps the most important consideration when diversifying your portfolio is the degree of risk you are prepared to tolerate in the competitive marketplace. High-risk investments typically offer much greater potential rewards; this is necessary to attract investors who could otherwise earn similar returns with much greater security. Depending on your personal risk tolerance, you may be able to achieve a much greater return on your initial investment by taking a chance on venture capital funds or other high-risk, high-reward securities. Balancing that added risk against steady and reliable performers and low-risk bonds and CDs can ensure that your portfolio remains viable even during major downturns in the stock market or the economy as a whole.


 
 



 
 
 
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