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Why Diversification is so Important

Jan 20, 2008
You should never trust just one stock so much that you are willing to risk all you money in it and no other stock. A wise investor always spreads out their money among several different stocks so as to minimize the effect of a bad day in the stock market. It doesnt matter how how or how stable you think a company is, the fact is you should never invest soley in that company.

Were not just talking about buying different stocks here. Were also talking about investing in different industries. If oil is doing bad then commodities may be doing well or vise versa. Just concentrate on investing in several different areas so your portfolio is effected by a big hit in one specific industry.

Its certainly been proven that investors with diversified potfolios see a more consistent return that investors who invest in only one or two stocks. Diversification is also a great way to decrease risk while maintaining aggresive returns. You can even diversify with penny stocks.

Lets say you invested in this one hot stock that you were completey sure about. One day that company has some bad news and investors make run for it and the stocks takes a dive. Thats bad new for your poor portfolio. Lets say that on the other hand you invested in 10 different stocks. One of those stocks has a bad day but you arent so worried about it because you have nine other stocks keeping your portfolio strong. See the difference?

You dont have to limit your portfolio to stocks. You can also invest in realestate, real property, and bank CDs just to name a few. The whole idea of diversification is to protect yourself while making satisfying gains. So around and study out the best investment options for your particular goals. Diversify along the way to win the game.

To demonstrate a real world case of how important diversification is I will tell you a personal story. When I first started investing I put 10k down on a very popular stock that did nothing but climb in value year after year. I simply had no reason to believe that this stock would perform in any other way except a postive direction. Wrong!! I lost 5k as a sadly watched this stock plummet as the result of corporate fraud. Lesson learned. Diversify!! That was a lesson learned the hard way for me but you dont have to learn the hard way. Take it from me. Invest in more than one good stock, at least 5.
About the Author
Scott Johns conducts research and analysis of stock market picks for a penny stock analysis company . To check out Best Penny Stocks and Picks for some of his company's latest picks.
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