| Diversify your Portfolio

Diversify your Portfolio


Are you ever worried about your job?  If you lose your job, will your income cease to exist?  The problem with having just one job and just one source of income is that if you lose it, you stop making money altogether.  The same goes with investing in stocks.  If you invest all your money in one company and the company tanks, you lose your entire investment.

You must diversify your stock portfolio to reduce your risk.  Taking risks is generally a good thing in the stock market if you are looking to make a lot of money, especially if you are young.  Still, the risk of putting all your money in one stock is completely unnecessary.  This risk will not increase your potential earnings, it will only increase your potential failure.

Let’s say you invest all your money into one stock that finance professionals believe will increase 25% in the next year.  That is a high risk because in order to increase 25%, the stock must either have a lot of growth that it may or may not get, or it’s extremely undervalued and may or may not go up.  If the stock goes up 25%, or even just 10%, you’ve done well, but if you goes down 25% or goes under completely, you’ve lost a lot of money.

Even if you want to take a lot of risk, you could still diversify your portfolio with many risky investments.  If you invest your money in 5 stocks that all expect a 25% increase and on 2 of them lose all their value, you’ve still made a 15% return which is very good.  The probability that 5 stocks will diminish or even just decrease in value is much less than just one.

Be smart with your diversification.

Diversify according to your situation, how much money you want to make, and the safest most secure way possible. You are basically going to need to calculate how much risk you’ll pass up to be safe. If you are young, you can take more risk because you have more time to make back what you’ve lost. As you get older and closer to retirement, you need to take less risk.

You can take less risk by investing in solid companies that have been around for a while and have little chance of falling through and also by buying bonds and government securities.

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