Introduction to The Importance of Diversification

(1 of 9)

Diversification is the great buzzword of investing; it is a strategy that helps reduce risk. Let's look at it in more detail.

What you will learn

  • What Is Diversification?
  • What Are Unsystematic and Systematic Risks?
  • Allocating Assets for Efficiency
  • Diversification across Companies
  • Diversification across Asset Classes
  • The Pros and Cons of Diversification
  • Asset Allocation Based on Your Risk Tolerance

What do you know?

Introduction to The Importance of Diversification [FFC 2013]

Avoiding risk is difficult no matter how you choose to invest. Most investors are aware that you must take greater risks to have the potential to achieve higher returns. However, no one wants to take more risk than necessary to achieve one’s financial goals. Diversification helps reduce risk but does not assure a profit or protect against loss.

There are some risks investors take for which they expect to be rewarded. Other risks are so haphazard that they cannot be rewarded, nor should investors take them. It is the latter kind of risk that investors can eliminate through diversification. Savvy investors don’t take risks for which they don’t get paid.