{"id":1294,"date":"2024-06-10T17:00:23","date_gmt":"2024-06-10T09:00:23","guid":{"rendered":"http:\/\/blog.imoney.my\/?p=1294"},"modified":"2024-06-10T23:49:29","modified_gmt":"2024-06-10T15:49:29","slug":"the-importance-of-diversification-in-investment","status":"publish","type":"post","link":"https:\/\/www.imoney.my\/articles\/the-importance-of-diversification-in-investment","title":{"rendered":"The Importance Of Diversification In Investment"},"content":{"rendered":"

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Diversification is by far the most underrated and least understood concept in investing.<\/p>\n

Intuitively, it should make sense. You shouldn\u2019t \u201cput all your eggs in one basket\u201d.<\/p>\n

The US Securities and Exchange Commission provides an excellent example of this concept on its website:<\/p>\n

\u201cHave you ever noticed that street vendors often sell seemingly unrelated products \u2013 such as umbrellas and sunglasses? Initially, that may seem odd. After all, when would a person buy both items at the same time? Probably never \u2013 and that’s the point. Street vendors know that when it’s raining, it’s easier to sell umbrellas but harder to sell sunglasses. And when it’s sunny, the reverse is true. By selling both items \u2013 in other words, by diversifying the product line \u2013 the vendor can reduce the risk of losing money on any given day\u201d<\/p><\/blockquote>\n

Source: www.investor.gov<\/a><\/p>\n

The key takeaway is in the last sentence. When we diversify, we reduce the risk of losing money. Many investors claim to understand this, but their actions suggest otherwise.<\/p>\n

<\/span>Is your investment portfolio diversified?<\/span><\/h2>\n

Think having a 50 stock portfolio provides you with enough diversification? Not if all 50 companies operate in the same country and are susceptible to the same economic forces.<\/p>\n

Have\u00a0 you always believed that having all your money in the local bank gives you virtually no chance of losing money? Not if the currency depreciates sharply (yes, you may not \u201close\u201d money when the currency depreciates but the purchasing power of your money decreases. We are living in a \u201cglobal economy\u201d after all).<\/p>\n

Think having a few investment properties protects you from a weak property market? Not if all your properties are of similar type (e.g. residential apartments) and are located in the same geography. In fact, multiple mortgages often increase the risk, as any gains or losses are amplified.<\/p>\n

<\/span>What is a well-diversified portfolio?<\/span><\/h2>\n

Generally, a well diversified portfolio has little exposure to any particular factor or event<\/em>. These factors or events<\/em> could be as broad as the economic conditions of a country, or as specific as the location of a property.<\/p>\n

The difficulty is in identifying and reducing your exposure to as many of these factors or events<\/em>. As a rule of thumb, there are two ways you could improve the diversification of your investment portfolio:<\/p>\n