The primary purpose of portfolio diversification is to minimize investment risk by distributing a portion of the funds across diverse assets. This limits the negative effects of one poor performance investment from ruining a person's returns, and this way investors enhance the chances of attaining more stable, smoother returns over time.
In general, diversification involves investing in assets that would react differently to the market environment - such as stocks, bonds, commodities, residential real estate, and even cryptocurrencies. While equity would typically allocate funds across the "{50-55}" stages of economic growth, it will probably work best for bonds in the downturn period or, for the most part, include commodities like gold or digital automations like Bitcoin for hedges against inflation or currency depreciation.
Diversification perfectly emphasizes risk management relative to understanding the correlation between assets. You can diversify your contract so that the movements are poorly correlated or inversely correlated. Funding disencumbers against industry, geography, and capital market sizes while really reducing great risk within certain specific sectors and/or regions.
To make the balance right, over-diversification should be avoided as this might dilute potential returns. Regular assessment and rebalancing of the portfolio will keep the portfolio updated with the investment objectives as well as risk tolerance.
A portfolio is supposed to have allocations across various asset classes thereby defending an investor against various unpredictable events that may happen across markets and increase the resilience and stability of the investment for a longer term Investment Diversification is a quality not just of protection against risks, but also of successful investment strategy.
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~ Nesaty
It is a great post of Allocating Funds Across Various Assets to Reduce Risk.
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