If you are not new in the investment world, then you must have heard about the magic of diversification. Over the years, experts always highlight the wisdom of it.
In its literal meaning, diversification is the act, or an attempt, to attain varieties. To put it simply, this translates to not putting all your money in simply one type of securities.
Basically, the concept suggests that you invest your capital in different forms of securities. Accordingly, this is highly beneficial to help reduce the risk of investing, allowing quicker Return on Investment (ROI).
The reason why it is capable of doing so is because, when something unexpected happens to one of your securities, you will not find the impact massive harmful. However, that is different if you merely have one security to invest.
That said, it does not mean that the more you diversify the better. Abusing diversification, also known as over diversification, will prevent you from concentrating your investment in securities that you prefer.
Also Read: 5 Advantages of Commodity Trading that You Need to Know
The Right Amount for Your Investment: Diversification vs Concentration
A series of debates over which is more preferable between diversification and concentration in investment poses an interesting topic to uncover. Some experts believe that diversification is more profitable, while some argue the opposite.
Truth to be told, diversification is definitely a more secure option between the two. As for answering what is the right amount, it depends on several factors, such as the available capital and your focus (though it is rare for experienced investors to invest in above 30 securities).
It is true that, through concentration, investors are able to fully focus and maximize their investments in one single security that they think is preferable. However, that indirectly means that they cannot have even the slightest error.
Meanwhile, diversification is more secure because it still allows investors to invest in securities that they like, but at the same time they can minimize their investment risks. The risk management plan should always be the objectives of any diversification.
Also Read: How Do You Calculate Risk Management?
