Diversified Investments. Making diverse investments can lower your risk.
Diversified investments are exactly what they sound like; a diverse package of investments in different fields. One of the basic principles of portfolio building is to have diversified investments. As the old saying goes, "Don't put all your eggs in one basket." You can reduce the risk of investing by spreading out your investments.
For instance, if you invest in an umbrella company, you'll do fine during the rainy season, but what happens when the sun shines? If you also invest in a company that makes suntan lotion, then part of your portfolio can do well during both rainy and sunny times. You can have diversified investments by choosing different types of investments -- such as stocks or bonds (known as asset classes) -- or by investing in different securities within one of those categories -- such as buying stocks that are involved in different businesses.
One way that investors ensure that you have diversified investments is by placing a certain percentage in different types of investments, such as stocks, bonds, cash, real estate, or gold. These are all examples of asset classes -- diverse groups of investments that may tend to perform in the same general way or differently during similar economic conditions.
Investing in individual stocks allows you to put your money exactly where you want to, in the stocks you've identified as having the best opportunities for making a profit. But diversified investments are even more important when you invest directly in stocks. If you invest in a single stock, your return depends solely on that security. If the stock does well, your portfolio will prosper.
When you build a diversified portfolio of stocks, you should aim to include stocks from different industries. Diversified investments can minimize the impact of any problems affecting a particular sector of the economy.
Another way to make sure your portfolio includes diversified investments is by company size. In your portfolio, you might want to include small companies that are growing rapidly, mid-sized companies that are growing moderately, and large companies that are growing slowly but surely. This strategy can help leverage risk, since you won't be concentrated in either the riskier "small-cap" stocks or the more stalwart blue chip companies, but you will have diversified investments.
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