Diversification: The what, why, how and how much
Diversification is one of the most important strategies when it comes to share market investing.
Diversification in one’s view is when investors reduce their exposure to stock specific risk while maximizing potential returns by increasing the chances of picking a winner.
By spreading investments across different shares, sectors, and asset classes, investors can mitigate the impact of individual share price volatility. But is there science behind the madness? Well there is and I will stress the importance of diversification in share market investing, as I aim to show how diversification can help investors achieve better risk-adjusted returns and reduce portfolio risk.
Understanding Diversification in Share Market Investing
Diversification in share market investing refers to constructing a portfolio that includes a variety of assets, such as shares from different industries or countries, to reduce exposure to unsystematic risk. Unsystematic risk, also known as “stock-specific” or “sector-specific” risk, arises from events that affect individual companies or sectors, such as management decisions or industry downturns. For example being invested solely in Iron Ore for the last 12 months. By investing in a range of equities, the negative price performance of one share or sector can be offset by...