Updated: Sep 1, 2019
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Why an investor needs diversification?
One of the most fundamental rules of market is not losing money in the market, and that is exactly where portfolio diversification comes in handy. It follows the age old saying which many of us can relate to: "Never put all your eggs in the same basket". In terms of finance, we put it: "Never invest all your money in a single asset class". If you are new to investments, start here.
The concept out here is that different asset classes perform differently all the time, i.e. gold prices rise when stock market volatility is high, debt instruments like bonds surge when returns from stocks/gold is low etc. Diversification provides optimised returns and also stabilises portfolio in the times of volatility. We should although understand that, diversification is not a return maximisation strategy, it is return optimisation, i.e. you don't earn highest possible return but it minimises risk of loss* and still provides good returns.
What are the types of diversification?
So now when we know the benefits of diversification, let's dive into the types of diversification strategies we can use: