Importance of Diversification

Competent investment management is critical to achieving returns and helping investors meet their financial goals. Over the next five weeks, the Trinidad and Tobago Securities and Exchange Commission (TTSEC) will be providing information on the topics of portfolio diversification, financial statements, the investment process, indicators of a viable investment opportunity and the impact of interest rates on investments. This week’s article discusses two very important aspects of investment management, which include Diversification and Asset Allocation. 

Diversification 

Both individual and institutional investors may hold a diversified portfolio of investments rather than a portfolio concentrated in just a few types of investments. A key reason for this diversification is the desire to manage risk, which is consistent with the saying, “Don’t put all your eggs in one basket.” Diversification is one of the most important principles of investing. When securities with different characteristics are combined in a portfolio, the overall level of risk is typically reduced. Adding more unrelated securities to a portfolio will reduce risk through diversification. 

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