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What are Diversified Investments?

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  • Written By: Mary McMahon
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  • Last Modified Date: 16 September 2016
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Diversified investments are investments which are spread out across a wide array of securities to minimize risks for the person making those investments. Making sure that investments are diversified is critical to doing well, no matter than condition the market is in, and it's one of the principles that novice investors are constantly lectured about. Put in simple terms, making diversified investments involves not putting all of one's eggs in the same basket.

The idea behind diversified investments is that when a few investments fail to pay out or begin to struggle, they don't drag down the whole investment portfolio, because the loss is negligible when it is averaged across all of the investments held in the portfolio. Furthermore, having diversified investments ensures that people are more likely to be in a position to take advantage of market upticks and emerging trends, because they hold investments in a variety of areas.

Diversification should include a number of different types of securities, such as stocks, bonds, and so forth. It also includes securities in a number of different fields. In other words, rather than just holding investments in the financial sector, someone should also have investments in technology, auto manufacturing, and so forth, spreading the risk out across multiple industries in addition to multiple types of securities. Finally, good diversified investments are also international in scope, so that people are somewhat insulated from the fluctuations of individual markets.

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Some investors prefer to leave the actual work of investing to skilled brokers and firms. Seeking out a diversified investment firm is highly advised, as the members of the firm will be prepared to make good investments on behalf of their clients. Mutual funds can also be used as a source of diversified investments, because they involve the pooling of funds from numerous clients to allow for the purchase of a wide range of investments.

For retirement funds, diversification is especially critical. Young investors who get burned by bad investments may have a chance to rebuild, but people near retirement age are very vulnerable to market fluctuations. Poor investment decisions can result in a shrinkage of available retirement funds, which can be a very serious problem. People who are not experienced in dealing with investments should definitely consider using a financial adviser, if not an investment firm, and they should discuss their expectations in regard to retirement with their advisers to ensure that their funds are invested intelligently.

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Discuss this Article

Charred
Post 4

@SkyWhisperer - If you would have a diversified your portfolio, even during the Internet bubble, you could have survived. For example, your technology stocks would have tanked, but stocks in consumables might have risen. There would have been an offset to counterbalance your losses. But like you said, it’s a lesson learned I suppose.

MrMoody
Post 3

@Mammmood - I’ve always bought mutual funds, leaving the stock picking strategy to someone else. I know that some individual investors fancy that they are geniuses when it comes to picking stocks, but that rarely turns out to be true.

Fund managers work 40 to 60 hours a week, studying the markets, poring over reams of data and making the best investment choices possible on behalf o their customers. They've learned how to invest mutual funds the right way.

I don’t have that kind of time, and I’m not a genius. I’d rather let someone else do the hard work.

Mammmood
Post 2

@SkyWhisperer - I think your story has been repeated many times over honestly. Many people got burned in the Internet bubble. I think it’s easy to learn how to diversify investments if you quit looking for the quick return.

I have a mix of stocks, bonds and even gold in my portfolio, and like the article says, my portfolio has been able to weather the storms of the last few years.

That doesn’t mean my portfolio always goes up, but it doesn’t get slashed in half either. The best thing with a 401k is to start very early, and start putting something away, even if it’s not a lot.

If you don’t how to diversify, the fund manager can give you some advice. Usually they give you a prospectus too with a list of options.

SkyWhisperer
Post 1

I learned the hard way about the importance of diversification. More accurately, I didn’t diversify. At the height of the Internet bubble I stepped into the stock market and started throwing money at high flying stocks.

I didn’t know what I was doing, but in my naiveté, I thought the sky was the limit for these stocks, which were already trading at high PE multiples.

Boy, was I wrong. No sooner did I buy in than these same stocks fell like a rock as the bubble began to crack and then implode. I didn’t cut my losses like I should have, instead hoping against hope that they would rebound.

I finally took a major loss, selling at

well below the buy price and licking my wounds in self pity. It was a lesson learned, however. Now I have a 401k and some mutual funds, and they have performed relatively well in boom and bust cycles. I can sleep at night too.

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