Why does an Investor Needs to Diversify?

The uprising threat and devastations of debt has given rise to terms like debt relief options, Debt settlement companies and debt consolidation etc. However, these alone cannot bring the situational monetary crisis in control. Apart from earning and saving, it is time to acquire wealth wisely by sensibly investing it with a proper process, to ensure future financial security. The first major lesson that an investor should learn in investment process, is the advantage of diversification, as the saying goes "don’t put all your eggs in one basket". Putting your funds in varied and numerous investments does, not only let you yield high-average return, but also minimizes your risk of loss. Suppose you invest your wealth between real estate and pharmaceuticals in a particular year, when the real estate industry have unpredictable done bad, while you still can balance and secure your return from the good profit of pharmaceuticals industry, reducing the risk of overall portfolio. According to calculations and investment experts, diversifying one’s wealth among a series of investments like bonds, real estates, domestic and foreign securities, common stocks etc can enable the investor to minimize the downside risk, while maximizing good returns. Also it has happened several times, that investors have gained tremendously by endowing their money in different assets that led to varied level of profitable returns made by each industry. On the other hand diversifying the portfolio lessens the fluctuation in investment performances, as losses from some sectors are offset by the gains in others. It makes sense moreover as no single asset class can assure performance in all economic environments.Diversification has three basic tools as cash (includes money market securities, treasury bills, short-term certificates of deposit), bonds (includes IOUs by corporations, governments and federal agencies) and stocks (include industry shares). Bonds provide more income and do have longer maturities than cash. Stocks over longer holding period provide the highest returns and greatest margins over inflation, although it involves higher risk factors than other financial assets. Thus your money market securities implies to your safety and liquidity, while the stocks will emphasize on growth, whereas the bonds for income. Now the amount of prominence that you would give to each of it, will depend upon your tolerance for risk-taking attitude, your knowledge of current market scenario,time factor and your achievement of financial goals. The experienced and literate investors use all the three of these tolls to get maximum investment benefits.Over a long period of time, a diversified investment process can outperform a conservative investment on only money market securities, while avoiding the higher risk of an all-stock portfolio and in doing so; an investor who diversifies his wealth should be willing to tolerate the volatility of annual returns which is more positive than negative. Remember that a diversified investment policy is a mid-way that does not completely make one risk-proof but it definitely ensures the investor higher returns by avoiding the risk and inertia of both the passive and aggressive strategies.