Diversification Explained – Part 1

Are your funds diversified?

If you’ve ever considered converting your portfolio to one particular item, think again. One listener wanted to trade his entire 401k for gold. I immediately thought of what King Solomon wrote in Ecclesiastes 11:2: “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” This is the principle of diversification. It’s a strategy of owning a variety of assets and investments to reduce exposure, risk, and volatility while increasing potential returns. Some assets may perform well in one year. Others may do poorly and vice versa. Diversification aims to produce steady overall returns. Everyone’s portfolios will vary depending on age and risk tolerance.

Investing puts money at risk in markets with the intention of multiplying resources. So spreading them to a variety of funds is a matter of balancing risk and reward. It requires a plan, an appropriate level of risk, and periodic adjustments with market fluctuations. It’s an investment strategy that can save you a lot of stress. The downside is that inexperienced investors may not balance their portfolios well. They may unintentionally risk too much on a particular stock or category. On the upside, diversification lowers risk and volatility by providing more stability over time. Returns are more consistent because winners offset losers. Plus, investors can dabble in new opportunities without the fear of losing everything. Solomon said it’s good to diversify, and I agree!

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