The Importance of Diversification
Risk is inherent to investing. However, there are strategies and techniques used to mitigate that risk. Diversification is a risk management technique that involves increasing the variety of investments in your portfolio. Investments have different factors about them that make them unique, such as the issuer, maturity date, and asset class.
The issuer is the institution that issues the investment, such as a bank. An investment's maturity date is the future date that your principal investment amount is paid back to you. An asset class is a type of investment. Stocks, bonds, and CDs are all examples of asset classes.
When you invest in securities in a variety of asset classes that have different issuers and maturity dates, the odds of losing your entire investment are much less likely because you aren't putting all your eggs in one basket. Each investor will take different factors into consideration when investing. It is important for you to know your objectives when investing because they can help you determine how you can best diversify your investments.
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