5 Key Benefits Of Portfolio Diversification | Why Diversification Is Important

Diversification is an investment strategy to ensure stability in the investment portfolio.

When an investor diversifies his/her investment portfolio, he/she basically allocated money in equity and other financiadiversity l instruments like gold, debt funds, foreign stocks, etc. There is no fixed method of diversification as everyone has a different risk profile and different time period to stay invested.

Why Diversification Is Important?

Well it depends, if you’re an aggressive investor and have courage to see red portfolio then you don’t really need diversification.

But an investor who is making investments for longer period expects to see as much greenery as possible. With the diversification strategy an investor will try to allocate money as per his/her risk profile so if one or more fund or stock underperform then there will be some outperforms as well. Theoretically, diversification makes your investment portfolio safer, but, still no one can give guarantee about it.

I hope you have understood the basics and importance of diversification. Now let’s take look at key benefits of diversification.

1. Reduces the impact of markets volatility

Volatility is the nature of the stock markets. A high volatile portfolio can impact your investment decisions but a low volatile portfolio makes a investor clam.

Diversification is the best way to lower down the impact of market volatility.

2. Helps in achieving long term goals

First all, a clam investor can stay invested for longer horizon.

With diversification, you allocated money in different assets and one key benefit of this is that if one assets under perform then there will outperformers assets too.

3. Less time spending for monitoring the portfolio

If one has a concentrated portfolio, then he/she needs to be more active and stay updated. One needs to book profit or average out whenever the markets goes up or down. That consumes time.

On the other hand, diversified portfolio doesn’t need that much time as investors have allocated money into different asset classes and each asset performs differently at the same time.

So one investor can diversify his/her investment portfolio and spend less time monitoring it.

4. Helps you to keep your capital safe

Well, one aggressive investor can make investment in very few assets and earn high returns but there is always a high risk of losing the invested capital.

Diversification is complete opposite of that, one investor can’t get super high returns but diversification promises safety of invested capital.

5. Freedom from “fear of losing money”

Aggressive investors have courage to book losses and moved on but that’s not what everyone can afford.

The money we have is our hard earned money! Nobody likes to lose it. Diversification is the only way the kill that fear.

There’s nothing risk free in the stock market but one can minimize the risk.