Portfolio Diversification

Portfolio diversification is one of the most important functions for every portfolio of stocks and assets under investment management.

The idea is to create a portfolio that includes different investments in order to reduce the overall risk of the portfolio. Especially when an investor buys a company’s stock and in the event that there is a negative downside with this particular company, investors may suffer losses.

Why we diversify?

On the other hand, with proper and well-structured diversification implementation, the parallel investments from the same portfolio may compensate for the potential loss from a single stock or asset investment. 

A diversified portfolio does not guarantee immunity against losses, but has the ability to significantly reduce the expected risk of the overall portfolio and if implemented properly can make returns, regardless of asset, stock or market downside.

Implementation

Portfolio diversification should not take place arbitrarily as certain procedures and rules should include the combination of mathematical, statistical and economic concepts. A diversified portfolio could include more than 10 different types of stocks, under different industries and sectors.

The basic structure

When investing or managing a diversified portfolio with different

asset classes, these asset-class when diversified, could include stocks, commodities, precious metals, bonds and different

currencies. Or it could include difference assets classes which could be in the same industry

sector.

Diversification style

Diversification is a very important tool on the hands of those managing assets,

investing in stock markets or other industry markets and is the cornerstone of modern portfolio theory in financial

economics.

Importance of diversification