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Diversification real meaning in Investment


What actually Diversification means in Investment?




               We all have probably heard the saying that you need to "diversify" your portfolio - the technical term for not putting all of the eggs in one basket.

Diversification Definition


              "Diversification is not just about having a bunch of different mutual funds,stocks or ETFs . A lot when asked about diversification of  investment  people will say, 'Yeah, my portfolio is diversified,' and when you look at their portfolio, they have 10 different mutual funds, but all 10 of those mutual funds are large cap value mutual funds or  large cap stocks or something like that."
"Just because you have a bunch of mutual funds or ETFs does not mean your portfolio is diversified".

"The importance of diversification is that markets always goes through different cycles or phrases.Certain asset classes or certain pieces of the world economy are going to be up when others are going to be down. The goal is to minimize your overall exposure to one asset class so if that asset class does not perform as well, there are others holding up by managing the overall PNL of your portfolio ."
It usually happens that Investors put together a "collection" of investments rather than a portfolio. Because investors don't understand what's going to serve their best big-picture objectives, and they purchase or select investments based on factors like past performance or names they recognize.
Diversification means investing in  different Un-corelated markets.it means supppose if the stock market goes down ,our whole portfolio shouldn't go totally negative.Some assets should there in our portfolio to hold up in bad market situation.Un-corelated ,because if the stock market goes down ,we should also have investments in gold, commodity market or in bond.There is less likely that all those markets also goes down at the same time,so those are called un-corelated markets.

Diversification Plan

           So before investing , investors should ask themselves, "What do I need my investments to do for me in order to be successful?" .You need to  develop an investment strategy that's properly diversified among the appropriate set of asset classes rather than through different funds that may overlap.

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