Advantages And Disadvantages Of Diversification
A common goal that many investors hope to achieve is maximizing investment returns while reducing risk. Although it may sound like an achievable investing goal — almost as achievable as juggling a group of chainsaws that are on fire — but, what many investors do not realize, it is actually and easy and important goal for new and passive financial investors to achieve. And, diversification is one of the easiest ways to do so.
There are plenty of tools and resources available that make it easy to diversify brokerage accounts, retirement accounts, or other investment funds. For example easy and cost-effective exchange Traded Funds or mutual funds and investment portfolio management software will help portfolios get diversified quickly and efficiently
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Diversification is a part of the asset allocation process, which deals with how much of a portfolio is invested into various asset classes. There are many options available for diversification, each having its own advantages and disadvantages and responding differently across the economic cycle. When looking at retirement plans and brokerage portfolios, common types of assets that investors may see …show more content…
The disadvantage of owning a variety of assets is that investors will never be able to fully capture the gains and returns. Diversification has a net effect that enables slow and careful performances and smoother returns, never shifting upward or downward too quickly. The reduced volatility that comes from portfolio diversification helps ease financial distress in investors.
The risk of diversification
While diversification is a simple way for investors to reduce portfolio risk, it is unable to eliminate risk entirely. There are two broad types of investment risk:
Market Risks. These risks come with owning an asset of any kind, including cash. The market potentially can become less valuable for assets due to preferences made by an investor, a change in interest rates, or other factors, like weather.
Asset-specific risks. Asset-specific risks originate from companies or the investments themselves. These risks include the success of a company’s product(s) , the stock price, and the management’s
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