What is a diverse portfolio and why it’s important

1. Different Asset Classes

Different types of classes of assets have different performances during the same economic event. So, different classes of assets such as stocks, fixed-income investments, commodities, real estate, cash, etc. can be included in a portfolio for diversified investment resulting in lowering the overall risk.

2. Different Individual Companies

Different individual companies perform differently in the market according to the different factors. So there should be a mix of such companies to reduce the portfolio’s overall risk.

3. Different Industry

The portfolio should have balance across multiple industries in the economy as some events are industry-specific. If that event occurs, the only value of investments in those industry instruments will only decrease. So, one should invest in different industries so that a portfolio’s overall risk is low.

4. Different Geographical Dimensions

Most investors have biases towards instruments issued in their home country. But it is always beneficial to diversify the portfolio internationally because an event that is negative for one country might have no effect on other countries or might have a positive effect on other countries. So if the investment is diversified geographically, then a loss in investment in one country can be offset by international investments.

Advantages of the Diversified Investments

Below are some advantages of Diversified Investments.

1. The diversified investments help in minimizing the risk of loss because if one investment doesn’t perform well over a particular period, then other investments in the portfolio may perform better in that same period helping in reducing potential losses associated with the investment portfolio if all the capital is invested under a similar type of investment.

2. Sometimes the investments might not generate the returns as expected, so in that case, the diversified investment helps because through diversification, one is not merely relying on one source for generating the income, and he is investing in diversified investments.

3. When the investments are well diversified, lower maintenance will be required because care and attention are required to keep the investments performing well, and if there is a risky venture, then a huge amount of time will be required to watch the markets. A well-diversified portfolio is generally more stable and less exciting, so once they are settled into a variety of classes, they can be there for extended periods and do not require much maintenance.