Why is diversifying your investment portfolio important?

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Diversification of your portfolio means that your investments are spread out into different categories. This can mean you are investing in different industries, but also at different levels of risk.

Diversification means that you reduce your risk of loss. If you are invested in a range of different industries, one industry not performing well won’t mean that you are in loss, because your other investments might still be stable, or performing well. This is why it is important that you invest in industries that are not directly correlated with one another.

Diversifying your portfolio means that you have more exposure to good opportunities. Different sectors may be doing well at different times, and rather than all your money being in one sector, you are able to yield the benefit of the industry that is thriving at any time.

The key benefit of diversification is that you are not as sensitive to swings in the market: your portfolio is protected from volatility. For example, the bond and equity markets move in opposing directions, therefore, investing in both of these areas will protect you from undesirable changes in the market.

Although a diversified portfolio will reduce risks of investment, it may become overly complicated if you have multiple investment streams. Additionally, you may end up spending a large amount on transactional and brokerage fees.

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