Advantages of a Diversified Portfolio

by S. Herlihy ; Updated July 27, 2017

A portfolio is a collection of investments. A portfolio may refer to collection of stocks in various industries or a combination of assets that perhaps includes real estate, bonds, annuities and blue chip stocks. A diversified portfolio is a very good way of meeting one’s financial goals while minimizing risk.

Diversification

The term diversification means varied. Ideally an investment portfolio should contain a mixture of investment vehicles that will enable to investor to meet his or her financial goals within the desired time frame.

Types of Investments

There are many places where a saver may place his or her money. An investor may invest in real estate by buying and selling houses. He may also buy houses and rent them out to tenants. An investor may buy precious metals such as gold or silver. An investor may also invest in bonds. Bonds are corporate lending mechanisms. A buyer buys them for a given period and the company agrees to pay back the money with addition of an agreed upon portion of interest.

Investors may also choose to invest in the stock market or stock markets in various countries.

Risks

One of the problems with any investment is the potential to lose money. If the price of a house you have purchased goes down and you need to sell you may lose money on the deal. If a company goes bankrupt and you bought their stock your company stock shares may be worthless.

Reducing Risk

A well diversified portfolio can help solve this problem. Diversification may mean investing in stocks as well as bonds. Or it may mean investing in real estate as well as annuities.

For many investors a well diversified portfolio means investing in various industries and various kinds of stock. An investor may invest in the technology sector as well as medical and publishing stocks. An investor may invest in blue chip stocks as well as small cap stocks.

This kind of decision making can help reduce the risk that any one form of investment will not do well. A technology stock may have a bad year. This can be offset by a medical stock that soars.

Risk Taking Without Risking All

If you are in your early twenties and just starting to save for retirement a diversified portfolio can also benefit you. You can choose to allocate only a part of your savings to a potentially risky venture such as a new start up company or overseas investment fund. Using diversification will help make sure that your entire portfolio is not at risk.

Steady Income

Another advantage of a diversified portfolio is that it increases the probability that you will have a steady stream of income. This can be important if you have short goals that must be met. For example if your child plans to attend college in the very near future. The ability to meet all tuition bills in a timely manner can be very important.