Issues In Investment Diversification And It Necessity

During the last decade of the twentieth century and beyond, many have achieved insurmountable success with reduction of risk in their investment through diversification. Financial diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk of its constituent assets.

Investment is the commitment of money or capital to purchase financial instrument or other assets to gain profitable returns in the form of interest income or appreciation of the value of the instrument in future. The simplest of example is provided by the proverb “don’t put your egg in one basket”. Dropping the basket will break all the eggs. Placing each egg in a different basket is more diversified. There is more risk of losing one egg, but less of risk of losing all of them at a time. Historically, diversification has it origin in many scriptural books in particular, the Bible, from Ecclesiastes which reads that “but divided your investment among many places, for you do not know what risk might lie” There is a disturbing reluctance in our time to talk seriously about matters if investment diversification.

Why? Perhaps it has to do with modern sensibility’s profound discomfort with the practices and ethos of investment behavior along with our bad habits, we’ve gotten used to not talking about the things that matter most. One will often hear that investment diversification is a private matter that does not belong in the public discussion arena because it all comes down to investors decision to decide its risk level while choosing investment commitment. But that analysis doesn’t hold water-at least on some important points. Whatever your financial investment or even if you have none at all, it’s a fact that when million of people stop believing in the indices that moves an investment enormous consequences follow and it becomes even greater when it is accompanied by major players aversion. How could it be otherwise? In modernity, nothing has been more consequential- or more public consequence than large segment of investors towing the same line of investment opportunity make a killing from it when there are no high competitions and make it saturated thereafter.

The risk reduction from diversification does not mean anyone else has to take more risk. If for example investor A owns $5000 of one stock and investor B owns $5000 of another, both A and B will reduce their risk if they exchange if they exchange $2500 for the two stocks, so each now has a more diversified portfolio.

If your expectations of return on all assets in the investment portfolio are identical, the expected return on a diversified portfolio will be identical to that of undiversified portfolio. Though, some assets will perform better than others, but since one does not know in advance which asset will perform better, this fact can not be exploited in advance. The diversified portfolio’s return will always be higher than that of the worst-performing investment. So by diversifying one loses the chance of having invested solely in the asset that comes out worst. That is the role of diversification. It narrows the range of possible outcomes.

Risk averse investors may find it beneficial to diversify into assets with lower expected returns, thereby lowering the expected return on the portfolio, when the risk-reduction benefit of doing so exceeds the cost in terms of diminished expected returns and since forex trading involves high risk, this will be highly reduced or eliminated with my system when you ride with today.