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How finance folk use it
Diversification is a method used to help minimize risks when investing. This is done simply by having different kinds of investments.
Imagine packing for a trip whose itinerary is unknown and only bringing shorts. If you end up having to go to a fancy dinner, your wardrobe wouldn’t be enough. Having other kinds of clothes will allow you to hedge your bets.
The idea is that having more than one option makes things much safer for your plans.
What would this be like when investing? One example is by having bonds when most of your investments are in stocks. Even if your stocks drop in value because of a bad market, your bonds will still earn you income through coupon payments.
Is it good or bad?
Some investments grow your money through interest while others increase in value but may also risk going down. With diversification, you can still be growing your money even if some investments are down. If you’re an investor, it’s good to be diversified.
What it means for you
There are many ways to diversify. One way is getting a mix of investments that fit different risk appetites. This means having a mix of the different assets – stocks, bonds, time deposits, etc.
You can also put your money in a unit investment trust fund or a mutual fund. These can already contain a mix of different kinds of assets.
