Diversification is a critical concept when assembling a
risk-conscious investment portfolio. If you own a variety of
investments, including several different types of
investments, poor performance from one or more of them is less
likely to depress the value of the entire portfolio.
So, it is tempting to conclude
that, if diversification is a good thing, a lot of
diversification is even better. Not so. Owning too many investments
or spreading assets across too many asset classes can work against
you.
Reducing Losses
Diversification is designed to reduce the impact of losses
that you might experience when certain asset classes, particular
market sectors or even the general market is struggling. While some
investments or asset classes lag, others may perform well, or, at
least, not as badly. Thus, diversification helps reduce the overall
volatility of your portfolio.
