Do you want to know the meaning and definition of diversification? We often hear the word “diversification” in investing forums, radios and television. And even on investment blogs and online forums, the word diversification is very popular. But, do you know what is diversification all about?. Do you know the benefits of diversification to investors? These are the things we are going to discuss today.
No investors want to lose money. They are investing because they want to make their money grow. One of their investing strategy is “diversification”. Diversification is also known as “asset allocation”.
Diversification Meaning and Definition
According to Brian O’Connell, “Diversification is the process of optimizing an investment portfolio by allocating funds to a number of different assets”.
This simply means you should not invest in only one asset. You should invest in other instrument so that you can properly allocate your funds and optimize your portfolio.
Benefits of Diversification
“Diversification minimizes risks while maximizing returns by spreading out risk across a number of investments.”
That is why many investors prefer to invest in different types of investments. To minimize the risk of losing capital and to maximize the growth of their investments. It is advisable to invest in different types of investments. If one of your investments didn’t performed well, you still have other investments to cover the loss of your “not performing asset”.
Reference: Brian O’Connell, Author, Build Your Own Mutual Fund, Adams Media, Avon, Massachusetts, USA pp.235
Diversification by Means of Asset Allocation
Allocating your assets should be done properly. Asset allocation is the way you distribute your assets. The question is how you should really allocate your asset. How much percentage of your assets should you put in different types of investments?
There are different types of investment. Investments such as bonds, stocks, real estate, mutual funds, ETFs, business, certificate of deposits, etc.
You should know the high risks types of investments and low risks types of investments when diversification. If you have investment funds in stocks, you should also have investments in bonds, that way your asset is in “balanced”.
But, you don’t have to guess. You should carefully allocate your assets according to your risks tolerance and age.
Now you know the diversification meaning and definition. You also learned the benefits of diversification and how should you allocate your assets. Start analyzing your assets now if they really need to diversify.