Diversification (FINANCE)?

Question

Diversification is????
Requires that you invest in hundreds of stocks in order to adequately diversify your portfolio
OR
The process of spreading your wealth among different assets

Answer 1

No need to buy hundreds of stocks. Mutual funds will do that for you. Buy into 5-10 different mutual funds, with low operating expenses and have high yield.

Answer 2

No do not invest in hundreds of stocks that would be grossly irresponsible, there is no way that you can possibly do all of the necessary research and work that is required to own a stock. all that is required for proper diversification is that you have a minimum of 5 stocks in 5 DIFFERENT sectors this means 20% per sector. For current market conditions I would recommend: Tech, Metals & mining, infrastructure, agriculture, and consumer goods. For example you could own CSCO, FCX, FWLT, DEER, and MO. These are all great stocks right now but I am not trying to tell you to buy these, simply trying to illustrate the point.
The purpose of diversification is that if something bad happens in one sector the most you will loose will be 20% assuming that your company goes out of business. For example during the recent sub-prime crisis had you been properly diversified you would not have lost very much money, but if you owned 3 financial stocks then you would be in the house of pain. I hope that this helps you.

Answer 3

Diversification includes investment in different asset classes to even the perfomance of your investments. Different asset classes react differently to changes in the business cycle by diversifying you smooth performance through offsetting losses in one area with gains or steady performance in another asset class.


Source:http://www.investopedia.com/terms/d/diversification.asp

Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.

Studies and mathematical models have shown that maintaining a well diversified portfolio of 25 to 30 stocks will yield the most cost-effective level of risk reduction. Investing in more securities will still yield further diversification benefits, albeit at a drastically smaller rate.

Further diversification benefits can be gained by investing in foreign securities because they tend be less closely correlated with domestic investments. For example, an economic downturn in the U.S. economy may not affect Japan's economy in the same way; therefore, having Japanese investments would allow an investor to have a small cushion of protection against losses due to an American economic downturn.

Most non-institutional investors have a limited investment budget, and may find it difficult to create an adequately diversified portfolio. This fact alone can explain why mutual funds have been increasing in popularity. Buying shares in a mutual fund can provide investors with an inexpensive source of diversification.

Unsystematic Risk

Risk that affects a very small number of assets. Sometimes referred to as specific risk.

For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of a company you have shares in, is considered to be an unsystematic risk.


Hope this get you started

Answer 4

Diversification means to invest in uncorrelated investments. Thats what asset allocation does. So, spreading your wealth among different asset classes is the correct answer.

Answer 5

To diversify is to divide.

In investing it would be to spread your wealth among different assets, like real estate, bonds, stocks, mutual funds, etc.

Answer 6

They're both diversification by definition.
You can diversify your STOCKS by spreading them out.
You can diversify your INVESTMENTS by spreading them out.

In general terms, it's better to diversify your investments through different means.

Answer 7

It could really be either one, but I dont think it "requires" you to invest in "hundreds" to correctly do it, so the second answer is the better answer.

Answer 8

And that's why Mutual Funds were invented.

Answer 9

"I believe diversity was an old wooden ship used in the cival war era"