The Two Benefits of Diversification

Here are the two benefits of diversification as listed in the wonderful book The Bogleheads' Guide to Investing (I LOVED the book -- see my rating for details):

• Diversification helps reduce risk by avoiding the "all the eggs in one basket" scenario.

• Diversification helps increase your return at the same time.

Then they give a brief paragraph on why you want to diversify your investments:

In order to diversify your portfolio, you want to try and find investments that don't always move in the same direction at the same time. When some of your investments zig, you want other parts of your portfolio to zag. Although diversification can't completely eliminate market risk, it can help to reduce that risk to a level where you feel comfortable enough to sleep well at night.

The book then continues and states that diversifying your investments is rather easy -- it can be done with a handful of funds quite simply.

I know I've gushed on this book quite a lot, but I want to say one more time how valuable I think it is. If you're an investor, you're thinking of becoming an investor, or have a friend, family member, etc. who fits either of these descriptions, The Bogleheads' Guide to Investing is a must read. Even if you don't take all the advice in the book, there still will be plenty in it (like the toll costs and taxes take on your investments) that will benefit any type of investor.

For more thoughts on investing, see Best of Free Money Finance: Investment Posts.

Comments

[Dr. Artfredo C. bella Ph.D - Africa]

* Diversification helps reduce risk by avoiding the "all the eggs in one basket" scenario. The concept of diversifying your investment is simply to eliminate risks. The risk of putting all your investment in one sector alone let alone it will become insolvent would make one vulnerable to risk and insolvency. But by diversifying ones investment, the possible risk of loss will lessen. If one company would lose another company company could recoup its loss. The other plus point of spreading your investment to several sectors would enable your investments - your money to extend to other lines of businesses thereby allowing other business sectors to augment their liquidity. this is classical to the Legends of the Yang Tse River of China where investors would scatter their goods to several boats rather than in on boat alone so that if one boat will capsize not all of their goods will be lost. This is also conceptualized and advocated by the insurance firms where they would offer their clients in the sharing of risks. Pay now so that in case anything happens to you or any member of your family the insurance firm would shoulder and compensate for whatever lost has been incurred by fortuitous or force majeur events.

* Diversification helps increase your return at the same time. Diversification would increase your returns since across the lines one company would create a multiple streams of income instead of single source of income. Diversification would create venues and ways for the creation of multiple streams of businesses and returns. Creating more diversified source of would entail greater leverage of partners, returns and profits. Diversification would also create ways of creating more allies in business, hence one does not become an island. By diversifying your investments. you meet more business partners and more investment returns.

[Dr. Artfredo C. Abella Ph.D - Africa]

Erratum:
Dr. Artfredo C. Abella Ph.D - Nigeria

[Dr. Artfredo C. Abella Ph.D. Philippines]

Diversification helps reduce risk by avoiding the "all the eggs in one basket" scenario. The concept of diversifying your investment is simply to eliminate risks. The risk of putting all your investment in one sector alone will become vulnerable to insolvency. But by diversifying ones investment, the possible risk of loss will lessen. If one company would lose another company could recoup its loss. The other plus point of spreading your investment to several sectors would enable your money to extend to other lines of businesses thereby allowing other business sectors to augment their liquidity. This is classical to the Legends of the Yang Tse River in China where investors would scatter their goods to several boats rather than in one boat alone so that if one boat will capsize not all of their goods will be lost. This is also conceptualized and advocated by the insurance firms where they would offer services to their clients in the sharing of risks. Pay now so that in case anything happens to you or any member of your family the insurance firm would shoulder and compensate for whatever lost has been incurred by fortuitous or force majeur events.

* Diversification helps increase your return at the same time. Diversification would increase your returns since across the lines one company would create a multiple streams of income instead of single source of income alone. Diversification would create venues and ways for the creation of multiple streams of businesses and returns. Creating more diversified source of investments would entail greater leverage of partners, returns and profits. Diversification would also create ways of creating more allies in business, hence one does not become an island. By diversifying your investments. you meet more business partners and more investment returns.

Posted by: Dr. Artfredo C. bella Ph.D - Africa | May 12, 2008 at 0