What Is the Importance of a Diversified Portfolio?

by Carmen Grant

Overview

Diversify for protection and profit.

325ed06f-4200-b90c-57c4-59257d40cdbc300400

A portfolio needs to be diversified to reduce investment risk. Risk occurs because of stock market volatility, which is our inability to know whether the market is going to go up or down.
Definition

Diversifying means that your investment portfolio is divided into different types of securities and industries. Securities are stocks, bonds, mutual funds, etc. Industries are the types of businesses or entities that a security belongs to. For instance, you can be an owner of a stock in the clothing industry.

Investment Risks

Every security has a different level of risk, as does every industry. A stock in a new company in the food industry will be much more unstable than a stock in a utilities industry. The same goes for mutual funds, since they are comprised of many stocks all under one fund.
Stable Investment

Bonds are very stable because they are backed by either the government or a corporation. The government has never defaulted on a bond loan.You don't want all of your money to be in safe investments, however, because you won't make any money this way and you will lose out on real earnings.
Mixing Investments

It is important to have a mix of very safe to moderate to risky investments in your portfolio to make money and keep money. For example, if you have 20 percent in stocks and 80 percent in bonds, if the market takes a dip, only 20 percent of your money might be affected rather than all of it.
Seek Advice

Diversifying is a balancing strategy. It is intended to protect you, and to make you money. For more information on diversifying your portfolio, seek the advice of a financial planner.