How does diversification protect investors?
Diversification protects investors from unnecessary risk by spreading out your investments across the entire financial market rather than concentrating your money in one place. To properly diversify your portfolio, you need to:
- Invest in various asset classes. For example, you might put some of your money into stocks and some into bonds.
- Invest in different types or subclasses of a particular asset class. For example, when you put money into stocks, you could diversify between large cap, small cap, growth, value, domestic, international, and so on.
- Invest in different market segments. Let's say you want to invest heavily in technology when it comes to equities like stocks. That's great, but you should balance that out with investments in other sectors, such as healthcare or manufacturing. When it comes to bonds, you might want to diversify by investing in a way that allows you to hold bonds from various issuers and with different maturity dates.
Clearly, diversification presents you with a lot of options.3 The next step is knowing how much variety is enough — and what might be too much.
The right level of investment diversity
How much you need to diversify depends on your specific goals and risk tolerance. There is no one answer to what "correct" diversification looks like. But you can over-diversify, or spread your investments too thin.
Constantly adding new investments to your portfolio for no reason or holding more than five or six different kinds of assets can make your money harder to track and manage — and it doesn't help you achieve the point of diversification, which is to better manage the risks you take to earn a reasonable return.4
The "right" amount of diversification for you can be difficult to objectively measure on your own, which is why it's helpful to work with a third-party professional to help you. A qualified investment advisor can help with financial planning to identify how much risk is appropriate for you, and how diversified you need to be to reach your long-term investing goals.
Call us at 1-888-SYNOVUS (1-888-796-6887) today to see how partnering with a professional to manage your investments could make a big difference to your success.