Investing for your future
Diversification is a word that everyone throws around. It is good make sure your portfolio is well diversified in many industries, but be careful how much you diversify! Over diversifying can also hurt your returns. The more you diversify the less your risk, but the less your returns. If you own 1 company and it goes bankrupt you loose everything, if you own 10 companies equally and one goes bankrupt, that’s 10 percent of your portfolio, if you have 100 companies and 1 goes bankrupt, that’s only 1% of your portfolio, but if you have one company and it doubles, your whole account doubles, if you have one stock that doubles in a 10 stock portfolio, your account will increase 10%. If you have one stock that doubles and you have a 100 stock portfolio, your account will only increase 1%. Over diversification will cut back on losses, but will hamper returns. As the market always increases over time, the more diversified you are, the less chance you have of truly getting rich in the stock market, and just getting average returns.
Tags: Diversification, Returns