1. Risk and Diversification: Introduction
  2. Risk and Diversification: What Is Risk?
  3. Risk and Diversification: Different Types of Risk
  4. Risk and Diversification: The Risk-Reward Tradeoff
  5. Risk and Diversification: Diversifying Your Portfolio
  6. Risk and Diversification: Conclusion


With the stock markets bouncing up and down 5% every week, individual investors clearly need a safety net. Diversification can work this way and can prevent your entire portfolio from losing value.

Diversifying your portfolio may not be the sexiest of investment topics. Still, most investment professionals agree that while it does not guarantee against a loss, diversification is the most important component to helping you reach your long-range financial goals while minimizing your risk. Keep in mind, however that no matter how much diversification you do, it can never reduce risk down to zero. (For related reading, see Introduction To Diversification and The Importance Of Diversification.)

What do you need to have a well diversified portfolio? There are three main things you should do to ensure that you are adequately diversified:

  1. Your portfolio should be spread among many different investment vehicles such as cash, stocks, bonds, mutual funds, and perhaps even some real estate.
  2. Your securities should vary in risk. You're not restricted to picking only blue chip stocks. In fact, the opposite is true. Picking different investments with different rates of return will ensure that large gains offset losses in other areas. Keep in mind that this doesn't mean that you need to jump into high-risk investments such as penny stocks!
  3. Your securities should vary by industry, minimizing unsystematic risk to small groups of companies.
    Another question people always ask is how many stocks they should buy to reduce the risk of their portfolio. The portfolio theory tells us that after 10-12 diversified stocks, you are very close to optimal diversification. This doesn't mean buying 12 internet or tech stocks will give you optimal diversification. Instead, you need to buy stocks of different sizes and from various industries.

Risk and Diversification: Conclusion
Related Articles
  1. Investing

    The Importance Of Diversification

    Without this risk-reduction technique, your chance of loss will be unnecessarily high.
  2. Investing

    The Dangers Of Over-Diversifying Your Portfolio

    If you over-diversify your portfolio, you might not lose much, but you won't gain much either.
  3. Investing

    3 Reasons Successful Investors Do Not Practice Diversification

    Discover why many of the most successful investors do not bother to create a diversified investment portfolio.
  4. Investing

    Create a Diversified Portfolio With These 3 Steps

    Take these three steps to achieve and maintain diversification in your investment portfolio.
  5. Investing

    Top 4 Signs Of Over-Diversification

    Learn how to spot over-diversification in your portfolio and find out why some financial advisors are motivated to do it.
  6. Investing

    When Geographic Diversification Fails

    Geographic diversification is becoming an ineffective investing strategy, but there are others that pay off in the long term.
  7. Tech

    How to Help Clients See Value of Diversification

    One of an advisor’s most important jobs is getting clients to understand the value of diversification. Here are some tips that will help.
  8. Retirement

    Your Retirement Portfolio: Diversification & Alternatives

    Why diversification and alternatives can play an important role in your retirement portfolio.
  9. Investing

    Alternative Ways To Hold Your Net Worth

    If you're afraid of putting your money back into the financial system, check out these alternatives.
Frequently Asked Questions
  1. Why is social responsibility important to a business?

    Take social responsibility seriously, and your business could benefit from happier, more productive staff members while helping ...
  2. Which socially responsible retailers appeal most to ethical investors?

    Learn why ethical investors have many options in the retail sector, and discover which retail companies are most popular ...
  3. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  4. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
Trading Center