‘Don’t put all your eggs donate basket might be the most used ‘ut significant advice for investors looking to minimize the impact of volatility on their portfolio.
Different asset classes and instruments have distinct quality, risks, and characteristics; therefore, their respective returns potential tend to vary over the same investment periods. When an investment portfolio includes different investment assets in an appropriate proportion based on an investor’s risk profile, it can enhance the portfolio quality and help to weather out all market phases without losing sleep. That is what ‘diversification’ is all about.
Diversification is a risk-mitigation strategy to offset ‘osses incurred by one asset class or instrument by the gains of other assets in the portfolio.
- Amongst Different Asset Classes.
- Within an Asset class.
So, in addition to allocating the investments among stocks, bonds, cash equivalents, and other asset categories, investments should be spread out within different asset categories. The key is identifying investments in each asset category that may perform differently under various market conditions.