Introduction to Personal Investing

The Basics

Why is diversification necessary?

When you invest, it is generally thought that if you spread your investments in a variety of classes, and their values do not move up or down in the same way, this diverse portfolio will have less risk than if you invest all of your money in just one class or type of investment. A diversified portfolio may also have a weighted average risk less than the average risk of each of the investments in the portfolio. It is also accepted that, over time, a diverse portfolio will yield higher returns than one that is relatively less diverse and more concentrated, and will yield a higher overall return than any one individual investment in the portfolio. The main thinking is that positive results of these diverse investments should help reduce the effects of other investments that may decline, as long as your investment choices are not correlated or synchronous. If you have investments in U.S. stocks and Brazilian stocks, and a problem arises in the U.S. economy that may not affect the Brazilian markets, perhaps the investments that are exposed to the U.S. economy may decline, while the Brazilian stocks may not decline, or may even increase.


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