Reasons To Diversify Your Investment

Reasons To Diversify Your Investment

Just like the good old saying “Don’t put all your eggs in one basket” to avoid losing all if the basket tips over, diversification of your investment helps reduce any form of risk that may be incurred from investing in only one industry or asset class.

Diversification helps you spread your investment across various financial instruments, industries and other categories. Your sole aim in diversifying your investment is to increase your returns in different areas that would react differently to the same event.

It is hence, approved by investment experts as an important ingredient for reaching your long-term financial goals while substantially reducing risk.

Diversifying across industries

Mr. Jonathan has a portfolio of only travel company stocks. When the global Coronavirus pandemic hit, travel and tourism dropped drastically bringing the share prices of travel companies to an all-time low. This also affects Mr. Jonathan because now, his portfolio has experienced an obvious drop in value.

Let’s assume that Mr. Jonathan counterbalanced his travel company stocks with a couple of food industry stocks, only a part of his portfolio would be affected. His portfolio will however, climb in value from the surge in purchase of food items due to the panic-buying during the pandemic.

Mr. Jonathan can diversify even further across other industries because the more uncorrelated his stocks are, the better for him.

Diversifying across asset classes

Another area to consider diversification with your investment is across asset classes. Different assets like bonds and stocks will react differently in adverse events. When you combine different asset classes, you reduce your portfolio’s sensitivity to market upheavals.

Diversifying across geographical locations

This requires that you look for investment opportunities beyond your own geographical location. If the financial market is volatile in Nigeria, it may not be so in the United States or Europe – so investing in the ‘safe’ zones at that time may reduce or counterbalance the risks of investing at home.

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