The Meaning of a Diversified Portofolio

One of the advices we hear most often given to us about our personal finances is to start saving now and to have a diversified portfolio. Everyone says it, but what exactly does it mean. Heck, at one point I thought that it meant having many different types of briefcases! Well… Just joking. In all seriousness, a diversified portfolio actually is one of the most important things one should have, especially if they are investing long term.

This is the simplest definition of what a diversified portfolio is-Having your investments spread out into different stocks, bonds, markets, etc. In other words, not putting your eggs into one basket. What diversifying does for you is help you reduce risk while keeping a somewhat similar rate in return.

Let’s say that a one, or two, or even three companies or banks that you invested some of your money completely plummet while the rest of your investments stay on average. By having a diversified portfolio spread around the different markets (including international), the loss will not be as bad compared to if all of your money was invested into one asset. On the other hand, if all of your investments do good, you get about a similar rate of return that you would of gotten if you did not have a diversified portfolio.

Remember that in investing there is never guarantees. One should carefully research and plan how they want to diversify their investments. As I mentioned earlier, this strategy works best for the long term. This by no means is will get you rich overnight. Many will argue that for the short term investor, investing in just a couple of high performance investments is a better way to go. That sometimes may be the case, but for the average investor, I believe that the tortoise will slowly win the race.

I highly recommend reading JD in GetRichSlowlywho wrote an excellent post dealing with diversification as well.

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