Portfolio Diversification

Introduction

What is portfolio diversification? Diversification is a very important concept in investing. Diversification is when a portfolio contains many different stocks from different industries. For example, you could have stocks from the technology industry, from the food industry, and from the airline industry.

Risk

Diversification is extremely important in lowering risk. Every investor should have a diversified portfolio because if one stock crashes, there are many other stocks to balance it out. For example, if a large storm kept all planes from flying for several days, airline stocks

would probably fall, so if your entire portfolio consisted of airline stocks, you would lose a lot of money. However,if you had some airline stocks and some healthcare stocks, you wouldn’t lose as much because the healthcare stocks would balance out some of the losses in the airline stocks.

Conclusion

I want to emphasize one more time the importance of diversification. Every investing book you read will tell you to diversify your portfolio. A portfolio that isn’t diversified has a very high chance of losing a lot of money. Always remember to mix up your stock picks.