Diversification is the process of buying stocks and bonds in different sectors and industries so that your exposure to any one area is limited. This can help you remain confident in your portfolio even if one of your assets declines in value. Investors generally diversify their portfolios by allocating different portfolio percentages toward different investment options. The diversification effect helps you balance risk by having other assets to cushion the blow if you experience a significant loss in one of your holdings.
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What Is Diversification?
Diversification is an investing technique that reduces — but does not eliminate — risks. Allocating investments across various financial instruments, industries, and other categories allows you to benefit from the advantages of diversification.
It also allows you to capitalize on multiple trends rather than take an all-or-nothing approach with a single trend.
How does diversification work?
Diversification is when you invest small percentages of your money into several assets, which gives you exposure to a group of companies. Some of those companies may significantly underperform the market. When you diversify your portfolio, you may end up with underperforming assets. If you do not diversify your portfolio, and the few investments you select underperform the market, those investments will weigh down your portfolio.
Some investors get overwhelmed with the number of choices available and how they will diversify their portfolios. A MoneyLion investment account allows you to personalize your portfolio based on your risk tolerance.
MoneyLion provides diverse portfolios that match your interests. It also offers thematic investing to help you capitalize on emerging trends. A MoneyLion investment account has numerous features to monitor your finances and grow your portfolio.
Benefits of diversification
Portfolio diversification can provide numerous benefits for investors.
Investments can lose value
Any investment can fall on a bad earnings report or company-specific news. The rest of your portfolio could pick up the slack when one of your assets underperforms.
Not everything goes up
Some investments stay flat for years. While you wait for a company’s long-term growth opportunities to materialize, other assets can propel your portfolio.
A perfect investment does not exist
Each investment has a bullish and bearish thesis. An investment’s movement becomes less predictable as you expand the timeframe. Some small-cap stocks deemed as solid investments could fall within a few months. Other small-cap stocks could increase in the same period.
A perfect investment does not exist. Diversifying your investments introduces more possibilities to balance the risk and reward in your portfolio.
Different investments types affect performance differently
Some investments thrive in economic uncertainty while others flounder. Investments produce variances in performance based on sector news, valuations, revenue growth, and other factors.
Risk vs. reward
You can invest in a mix of high risk-reward assets and low risk-reward assets to balance your portfolio. Taking on too much risk may be dangerous, even if the potential reward is high.
Prevent you from locking in losses
Significant declines in your portfolio can lead to emotion-fueled investing decisions. Your anxiety may increase if a single holding tanks while taking up a substantial percentage of your portfolio.
Diversification can help you avoid certain risks
The benefits of diversification can help you avoid numerous risks. These risks can significantly impact portfolios that lack diversification.
Investment risk refers to the degree of uncertainty within your assets. A poorly diversified portfolio can be significantly impacted by a small number of uncertainties. Expanding your portfolio can lower risk because it takes a higher quantity of negative uncertainties to make your portfolio enter a correction.
Market risk refers to the uncertainties of the market as a whole. While market risks affect every stock, some stocks feel the pain more than others. Diversifying into different asset types allows you to get a blend of their advantages and disadvantages.
Each company carries risks that set them apart from other investments. A founder can exit, a major customer can look elsewhere for business, and a product launch can flop. These events mainly affect the individual company.
A diversified portfolio covers multiple industries, not just multiple stocks. If you only invest in stocks in a single sector, negative industry news could significantly weigh down your portfolio. Investing across various industries counters this problem.
An affordable strategy for building a diversified portfolio
Building a diversified portfolio takes time and resources. A MoneyLion investment account can get you on the right path — giving you access to numerous perks such as:
- Personalized portfolios — MoneyLion can craft a portfolio based on your risk tolerance
- Thematic portfolios—You can add portfolios based on interests and trends
- Automatic investing— let the investments happen in the background
Unlock the benefits of diversification
If you want to unlock the benefits of diversification, MoneyLion is here to help.
Our investment account can build you a diversified portfolio. Get started with a MoneyLion investment account today.