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The old adage that many of us have in recent years is “Do not put all your eggs in one basket!” simply means that diversification in investment. What exactly are the reasons why you have a diversified portfolio of investments?
Diversification means spreading your money into different asset classes like equities, real estate, bonds and money markets. It also includes investments in international markets. But why is it so important and it always does apply even in these days when the most active classes to attend a lost cause? Some reasons to diversify …
• The lack of action of all assets in the same manner and at the same time. Normally, if the actions of a good return on bonds are not. There are times where it does not work, but in general, when interest rates are low, stocks are becoming increasingly popular. And we can see that gold has increased investment in the current climate of confidence.
• Not all sectors to meet the same market conditions. In this case, consider two hypothetical companies. It is an investment umbrella winter rains and the sun to sell another sunscreen sold and are subject to a reversal of the summer. During the winter sun umbrellas are sold well in the summer sun protection is very popular. Sales vary for everyone, but if the two together the same average performance and reduce risk.
• Investments in different geographical regions, ie they are not subject to the same natural disasters affect businesses differently. Take for example the recent earthquake in Christchurch. Many companies have had problems after the region, either because of property damage and effects of damage to surrounding properties. In addition, there is a boom for construction companies in the months and years ahead, because the city is rebuilt. There is also a decrease in sales of properties and values, but those found with real estate investments in demand for properties intact as people looking to rent houses are damaged and repaired.
• Investing all the money in financial firms has been a bitter lesson for many New Zealanders, who once was seen as a safe investment with a known performance. This has been a lack of understanding of risks and, unfortunately, many do not travel all the funds of a corporation. Diversification within an asset class is also important to reduce the risk.
• Although the world population crisis far from investing in shares and cash. U. S. Treasury bills are actually showing in the crisis in the portfolio have reduced their losses when markets are declining. Who would have thought that some U.S. companies should be more important before the crisis, such as Citigroup would have saved.
While diversification does not eliminate the risk, the risk is reduced. Having a diversified portfolio of investments will remain valid long-term strategy.
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