Why You Need To Diversify Your Investments

Investment is always risky. But risk factor may vary from investment to investment. In the market you will find a vast variety of investment schemes. Some of which may include high risk factor but some may include low risk. It is the fact that if you invest in a scheme having high risk, return will be higher as compared to those investments having low risk related to them. The most significant way to save your investment is to invest on those investments which yield low returns.

Another way to reduce the risk factor is the diversification of your investment.  This is the easiest and the best route. You can save your investment, minimize the risk factor, and get the maximum benefit from your investment. Diversification is a technical term. It means that the investor spreads investment across different assets who offer returns which are not correlated. Diversification has become very necessary in this modern market scenario. You cannot trust any particular asset because it may go against your expectations at any time. Therefore, it is highly advisable to invest in more than one asset because your investment in other assets will be saved if any particular asset goes wrong.

In diversification of investment, the term “correlation” is widely used.  You must have a relevant technical knowledge to analyze the correlation between two or more than two specific assets.  The exposure of the investor should be sound about all related terms and conditions and the financial aspect of each and every aspect of even a small thing. You can reduce risk significantly if investment is made on a variety of assets and their return does not correlate with each other. For example, you invest on two assets. One of the assets relates to pharmaceutical and the other asset is related to a software company.

Market consultants advise the investor to spread his or her investment across fifteen to twenty individual and different assets. Never invest huge amounts on any particular asset because no one in the world can give full surety about the safety and protection of investment. If you get a fast conclusion of the market, you will come to the point that there are large numbers of companies offering investors to invest their money. They attract them by giving high returns and these companies try to suck maximum money in the shape of investment from the investor. They use so many tactics and they easily trap the investor. On the other hand, the investors get confused because it is not possible sometimes to select the most appropriate investment plan. In such circumstances, it is highly advisable to take in consideration two important points:

A – Never go for high returns
B –  Diversify your investment maximum

It should be kept in mind that the investor should not go for the quantity. Investing in a large number of assets doesn’t make it diversify. Diversification comes in when the investment is made on different variety of assets. Ideally, the investor should spread his or her investment of the following assets:

  • Stocks
  • Bonds
  • Real estate
  • International investments
  • Cash

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To reduce risk factors while investing, the investor should consider two points strictly. Firstly, he or she should never go for high returns and secondly the investment should spread across a variety of assets. Never invest in any one asset or those assets which are correlated with each other. In the world of finance this phenomena is known of diversification of investment.


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