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Is Diversification Mandatory While Investing?

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The importance of diversifying one's investments is often spoken about, but is this viable advice? Is this necessary?
asked Jul 28, 2015 in Investing by kingusama92 (23,380 points)
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Simply put, without diversification, there is too much risk. There are many other ways to take on too much risk when investing, but the risk scale is different for each person as well, based upon certain other investment objectives as well as each individual's risk tolerance. Still, no on should ignore the need to diversify when investing, as too much money wrapped up in any one asset or asset type isn't good. [1]


There are many ways to look at diversification. I'm interested in individual securities, and my view of diversification has been largely based upon Jim Cramer's views. I don't watch his show any longer or keep up with his website, but I really enjoyed listening to his investment perspectives. He dedicated a portion of each show to helping viewers understand whether or not they were properly diversified.
It is necessary to understand that too much diversification can impact your rate of return in a negative way. You can't buy the whole stock market. Therefore, your need for more or less diversification in your portfolio can vary even based upon the investments you choose. When buying individual securities, you definitely want to spread your money not just across different stocks but stock sectors. I have selected 14 individual stocks to make up my portfolio, but that number can fluctuate. I typically only go with one or two spec stocks at the most. I included another source that describes in further detail why diversification is so important, and it even models some historical data for you. Additionally, there is a video that talks about the topic in further detail as well. Watch out for that volatile stock market, and protect yourself with proper diversification.



Sources:
1. https://www.fidelity.com/learning-center/investment-products/mutual-funds/diversification


2. http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2013/05/31/heres-why-diversification-matters
answered Aug 3, 2015 by JLettermanMB (43,320 points)
selected Aug 3, 2015 by kingusama92
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You have to look at your portfolio as opportunities. You never want to have "all of your eggs in one basket", so to speak, right? It will depend on what it is that you are working with and where you are looking to invest. Someone who has a real investment portfolio will need to look into diversification differently than someone who is working with mutual funds or their IRA.

 

It is important to think over the long term and you need to learn what is going to give you the best growth. However, you have to be careful, as there are some investors who have found that they became TOO diversified. If you are unsure of what to do, you will want to work with a trusted adviser.

 

http://www.investopedia.com/articles/03/072303.asp

 

This video explains a bit of what you should expect:

 

answered Jul 29, 2015 by HollyC (16,400 points)

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