Diversification in Stock Portfolios

Assignment No 6

Diversification in Stock Portfolios

Introduction

Diversification is one of the key components of a successful investment portfolio. Almost all

experts advise the avoidance of concentrating all of your investments in one type. However,

many investors forget about diversification once they see a financially attractive stock and

concentrate all of their assets in it. Other investors make a similar mistake and being influenced

by their emotions fail to listen to their common sense whispering "Diversify".

Many companies have attracted their employees to investing in company stock as part of their

retirement plan through the provided matching of contributions. As a result most investors end

up concentrating their assets in company stock and forgetting about the importance of

diversification. Investing in your company's stock is not something bad. However, you should

own not only your company's stock, because if something bad happens with your company you

risk not only losing your job but all of your assets. Through diversifying your stocks among

different industries you decrease to a great extent the risk of losing your money..

Portfolio Diversification

You can use index funds or exchange traded funds to track a broader market index. This gives

you exposure to many different types of companies, without your individual research required.

Furthermore, your money is allocated between many sectors, so if financial companies hit a

rough patch, perhaps your oil companies will be doing well.

. The most diversified funds will have exposure to the largest sectors of the US economy, and are

generally linked to a broad market index (like the Dow Jones or S&P). For diversification, stick

with the index funds, as they will incorporate a variety of company types.

Managing overall portfolio risk

The most general definition of investment