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Basics >> The Importance of Diversification
Dont put all of your eggs in one basket! Youve probably heard that
over and over again throughout your lifeand when it comes to investing,
it is very true. Diversification is the key to successful investing.
All successful investors build portfolios that are widely diversified,
and you should too!
Diversifying your investments might include purchasing various
stocks in many different industries. It may include purchasing
bonds, investing in money market accounts, or even in some real
property. The key is to invest in several different areas not
just one.
Over time, research has shown that investors who have diversified
portfolios usually see more consistent and stable returns on their
investments than those who just invest in one thing. By investing
in several different markets, you will actually be at less risk
also.
For instance, if you have invested all of your money in one stock,
and that stock takes a significant plunge, you will most likely
find that you have lost all of your money. On the other hand,
if you have invested in ten different stocks, and nine are doing
well while one plunges, you are still in reasonably good shape.
A good diversification will usually include stocks, bonds, real
property, and cash. It may take time to diversify your portfolio.
Depending on how much you have to initially invest, you may have
to start with one type of investment, and invest in other areas
as time goes by.
This is okay, but if you can divide your initial investment funds
among various types of investments, you will find that you have
a lower risk of losing your money, and over time, you will see
better returns.
Experts also suggest that you spread your investment money evenly
among your investments. In other words, if you start with $100,000
to invest, invest $25,000 in stocks, $25,000 in real property,
$25,000 in bonds, and put $25,000 in an interest bearing savings
account.
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