Always Diversify Your Portfolio for Higher Return

Investment is an excellent way to grow your wealth and secure your future. However, you should never put all your money in a single mutual fund, FD, or any other financial scheme while investing. Instead, always diversify your investment portfolio so that even if a part of your portfolio is not performing very well, it can be compensated by other elements.

Portfolio diversification refers to incorporating various asset types into your portfolio. It assists you in reducing your portfolio’s risk so that one asset or asset class’s performance doesn’t affect your entire portfolio.

Diversification occurs in two ways: across asset classes and within asset classes. If you diversify across asset classes, you spread your investments across multiple types of assets. But if you diversify within an asset class, you spread your investments across many investments within a particular kind of asset. So, for instance, rather than buying stock in one single company, you would buy stock from many companies of various sizes and sectors.

Diversification can assist you to group assets of different risk levels in your portfolio. For instance, stocks have historically produced higher returns than bonds or cash, but they also come with more risk. On the other hand, while bonds don’t make the same high returns that stocks historically have, they can hedge some of your portfolio’s risk for those years when the stock market is down.

One of the significant merits of diversification includes better absorption of the shocks of a market downturn. Furthermore, the risk is well-spread out when you invest in diverse asset classes. Moreover, the non-performance of one asset class is made up for by a different asset class. So, put with a well-diversified portfolio, you can assimilate the losses in a better manner.

Another benefit of portfolio diversification is that if two portfolios yield the same returns, a diversified one will take lesser risk than a concentrated one. The latter will be more volatile than the former. Hence, for better risk-adjusted returns, it’s vital to have a diversified portfolio investing across asset classes.

It would be great if you diversify your portfolio to spread your risk to your entire portfolio. You will reduce risk by spreading your investments across many companies or asset classes. Furthermore, different asset classes — and even different assets within the same asset classes — behave differently depending on the market conditions. Finally, having a variety of other investments in your portfolio means that if a part of your portfolio is slow, the entire portfolio is still performing well.