Secrets About Investment Diversification
Probably everyone can identify with the old proverb "don't put all your eggs in one basket". We all know is makes sense not to encourage such risk. The same thoughts can be applied to our investment portfolios - no one likes to think they will lose money. We are told to diversify our risk, but is investor diversification the best plan for everyone?
Where we are at any point in our investment life cycle will have a huge bearing on our tolerance for risk. Some people are naturally risky, others much more cautious. For those starting out in their working careers the money they invest is very limited and they don't want to lose any of it. For those in the wealth accumulation years they tend to be much more risk tolerant. For them there is a bigger base so a small loss isn't as important and they have years to recoup any losses. For those at the end of their working lives or in retirement, the risk profile is probably much lower. All these factors mean that as individuals, our attitude to diversification will be different.
Diversification has an inherent flaw. If you are minimizing your risk, you may at the same time be minimizing your gains also. If we only invest in one stock we miss out on the opportunity to invest in three other stock picks which are having stellar returns.
For the smaller investor the amount they have to invest will determine the level of diversification they can achieve. We are told to have a number of different stocks, fixed investments, property etc. But to buy all these might end up with the investor having thimble sized investments in a number of areas, which just isn't sensible.
There are many instances where specializing have paid off, look at Henry Ford or Bill Gates, neither of these diversified their markets. But there are just as many examples of people who have not diversified and have been burnt.
In the end each small investor has to assess his risk profile and manage his investor diversification appropriately. - 23314
Where we are at any point in our investment life cycle will have a huge bearing on our tolerance for risk. Some people are naturally risky, others much more cautious. For those starting out in their working careers the money they invest is very limited and they don't want to lose any of it. For those in the wealth accumulation years they tend to be much more risk tolerant. For them there is a bigger base so a small loss isn't as important and they have years to recoup any losses. For those at the end of their working lives or in retirement, the risk profile is probably much lower. All these factors mean that as individuals, our attitude to diversification will be different.
Diversification has an inherent flaw. If you are minimizing your risk, you may at the same time be minimizing your gains also. If we only invest in one stock we miss out on the opportunity to invest in three other stock picks which are having stellar returns.
For the smaller investor the amount they have to invest will determine the level of diversification they can achieve. We are told to have a number of different stocks, fixed investments, property etc. But to buy all these might end up with the investor having thimble sized investments in a number of areas, which just isn't sensible.
There are many instances where specializing have paid off, look at Henry Ford or Bill Gates, neither of these diversified their markets. But there are just as many examples of people who have not diversified and have been burnt.
In the end each small investor has to assess his risk profile and manage his investor diversification appropriately. - 23314
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posted by Mr. Forex at
8:00 AM
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