Why is portfolio diversification essential for investors

They can also cushion you against unpredictable ups and downs of the stock market since they are very different from the way stocks behave. One good way to start is by buying government bonds which are not just safe but pay-out interest as well. Long Term Investments: There could be other long term investment options that could help create a well balanced and diversified portfolio.

For instance, real estate, some part investment in gold. If you are salaried chances are you already have an EPF account that provides long term growth in a safe asset.

It is important to create a portfolio that future proofs your finances. While many of us have all been used to traditional investments such as Fixed Deposits, the new interest rates and the rising inflation costs are not enough to keep us above water. In order to make your future secure, you need to make smart decisions.

One smart decision you can make is by downloading Basis and checking out your tentative retirement corpus amount. Use these tools to see how your money really stacks up, and whether your diversification mix is ideal.

Maybe you can structure an adequately diversified portfolio, staying flexible to a changing investment environment, and properly managing your asset allocation. But that can be both time-consuming and challenging, so you should have no hesitation whatsoever regarding the use of technology to help you achieve an ideal investment mix.

But don't assume a target-date mutual fund or ETF is enough diversification insurance. Sure, these may seek to internally diversify based on your expected date of retirement, but your particular needs and objectives may differ from others in your age group.

Also, consider whether the target date you choose is appropriate for you. In some cases, it may be helpful to own two or three target-date investments, for example, with retirement dates of and , instead of just Skip Navigation. VIDEO Invest in You: Ready. For instance, many synthetic investment products have been created to accommodate investors' risk tolerance levels.

These products are often complex and aren't meant for beginners or small investors. Those with limited investment experience and financial backing should consider purchasing bonds to diversify against stock market risk. Unfortunately, even the best analysis of a company and its financial statements cannot guarantee it won't be a losing investment. Diversification won't prevent a loss, but it can reduce the impact of fraud and bad information on your portfolio. Diversification is a strategy that aims to mitigate risk and maximize returns by allocating investment funds across different vehicles, industries, companies, and other categories.

A diversified investment portfolio includes different asset classes such as stocks, bonds, and other securities. But that's not all. These vehicles are diversified by purchasing shares in different companies, asset classes, and industries.

For instance, a diversified investor's portfolio may include stocks consisting of retail, transport, and consumer staple companies, as well as bonds—both corporate- and government-issued. Further diversification may include money market accounts and cash. When you diversify your investments, you reduce the amount of risk you're exposed to in order to maximize your returns.

Although there are certain risks you can't avoid, such as systemic risks, you can hedge against unsystematic risks like business or financial risks. Diversification can help an investor manage risk and reduce the volatility of an asset's price movements. Remember, however, that no matter how diversified your portfolio is, risk can never be eliminated completely. You can reduce the risk associated with individual stocks, but general market risks affect nearly every stock and so it is also important to diversify among different asset classes.

The key is to find a happy medium between risk and return. This ensures you can achieve your financial goals while still getting a good night's rest. Risk Management. Portfolio Construction. Portfolio Management. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Adding fixed income and equity, which offer the potential for relatively higher returns, can help your portfolio to grow and outpace inflation.

Many of these companies operate in global markets. International equities offer more opportunities to diversify. They add exposure to both developed and emerging opportunities outside North America. Historically, equities have had the highest growth. They also have the potential for higher losses. Fixed income Fixed income include many different types of bonds.

Fixed income typically offers higher returns than cash investments. But a portfolio consisting only of fixed income investments may not provide the growth you need. Adding equities to your portfolio can add growth and also help you take advantage of lower tax rates if you are investing outside a registered plan like an RRSP or RESP. Diversified portfolio Combining all three asset classes in your portfolio can help you benefit from the growth potential of equities and while you enjoy the increased stability and lower risk provided by cash and fixed income investments.

The right mix for you depends on your personal situation and preferences as an investor.