Strategy Beginner: The Importance of Diversification

Introduction to The Importance of Diversification 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 Summary of The Importance of Diversification
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Summary of The Importance of Diversification

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Summary of The Importance of Diversification [FFC 2013]

Diversification can help reduce portfolio risk by lowering unsystematic risk for which investors are not rewarded. Investors are often (but not always) rewarded for taking market risk. Because diversification averages the returns of the assets within the portfolio, it attenuates the potential highs and lows. Diversification among companies, industries, and asset classes affords the investor some protection against business risk, financial risk, and volatility. When they say, "Don’t put all your eggs into one basket," they’re talking diversification.

Ready to try your hand at some diversifying of your own?

Practical Ideas I Can Start With Today

  • Determine my risk tolerance. Use this calculator.
  • Identify, perhaps with a financial advisor, a range of investment options suitable to my goals.
  • Create a diversified portfolio of investments that is likely to provide the greatest return in keeping with my risk tolerance. Use this calculator.

What you have learned

  1. What Is Diversification?
  2. What Are Unsystematic and Systematic Risks?
  3. Allocating Assets for Efficiency
  4. Diversification across Companies
  5. Diversification across Asset Classes
  6. The Pros and Cons of Diversification
  7. Asset Allocation Based on Your Risk Tolerance

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