You need to diversify your investments to maximize returns while minimizing risk. Everyone knows that. See: Efficient Frontier. It can get hard, though, because companies can share characteristics that turn out to be obvious, but are so fundamental they can hide in plain sight.
Take geography. You invest in a promising app developer, a medical device company, an insurance giant and oil producer. Pretty good industry diversification.
But it turns out all those companies are headquartered in the same few blocks in Manhattan. Meanwhile, that part of New York has suffered an outbreak of a hallucinogenic black mold, which has caused every executive related to your portfolio to make erratic decisions, and to bark like seals during investor conference calls.
Now all the stocks in your portfolio are plummeting. A lack of geographical diversity coming home to roost.
In real-life practice, geographical diversity involves putting money in different countries and global regions. So don’t just buy stocks in U.S. companies. Look for firms centered overseas as well. Russia. China. Japan. New Zealand. Belize.
Well, maybe diversify to Belize by buying some beach-front property there.
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Finance: What is fund diversification, a...45 Views
finance a la shmoop. what is fund diversification and why is it important?
well ever hear the phrase don't put all your eggs in one basket ? yeah if you do
and there's a pothole, well, this can happen. had she put a few eggs here [woman drives car]
than another few there and then another few there well breakfast might have been
saved. well the same thing works for stocks. sorta ,put all your eggs and
shares of the newly IPO to whatever dot-com and it could be a moonshot. [chart on screen]
SpaceX IPOs at fifty bucks a share and soars to a thousand dollars a share, but
well then the Martians kill the visitors and eat their brains and the spacecraft.
oh well you were rich for at least an hour. that's something right most people [alien on flaming planet]
don't want to live such a volatile life, especially when it comes to thinking
about long-term investing and maybe even retirement. when your entire investment
portfolio is in one stock it can be a wild ride and if you're not a
professional investor it's likely that you'll get weak and sell at just the [woman types at computer]
wrong time .so instead of having to worry about timing and picking just the right
stock most investors buy a basket of stocks which are diverse. like two-thirds
US stocks one-third non-us stocks. maybe twenty percent of your portfolio is
invested in high-growth technology. ten percent is in transportation with a lot [pie chart shown]
of dividend yield. and of course there's always the one percent riboflavin. I
don't forget that. so yeah when you diversify and two or three of your
stocks take a dive, well then not all of your eggs are ruined. there are just one
or two rotten ones in the bunch while the rest are going to be used to cook [smiling man eats eggs]
one heck of an omelette.
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