You’ve heard the saying, ‘don’t put all your eggs in one basket’. Diversifying your investments is the same idea.
Diversification is a technique that mixes a wide variety of investments within a portfolio.
And if those assets perform differently under similar market circumstances - which means they have low correlation to each other – that is an equally important companion idea.
Building an investment portfolio of diversified investments that have low correlation is the foundation of successful investment planning.
Regardless of how you invest fluctuations in market cycles, types of asset, sectors and styles occur all the time and will impact your portfolio’s performance. Although diversification doesn’t guarantee that you will not have losses, it will minimize risk. Modern Portfolio Theorist have proven that over time a portfolio constructed of different kinds of investments will, on average, yield higher returns and have lower risk than any individual investment found within the portfolio.
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