Financial experts often talk about the pros and cons of diversification. It is desirable to diversify or spread your investments. It is better to hold more stocks then just holding one. There is a need to maintain balance in your diversified portfolio.

Definition Of Diversification

Diversification is a toll or technique. It is very commonly used by inventors and traders. It is an effort to reduce risks of default or loss on investments. In diversification investors spread their investments across various countries, markets and industries. It is a fact that diversification is not a surety that you will be protected by loss or default. It is a sensible and desirable planning that is adopted for achieving long term financial goals.

The facts reveal that by if you diversify across different investments then if one sector, industry or market gets loss other may gain profits or returns for you. It is important that portfolios you have selected must be highly correlated and they must be negative or substitutes to each other.

Risk can never be eliminated it can be reduced to some extent and it minimizes your losses. As market risk is attached to each stock or whole market so it can not be eliminated.

Tackling With The Unsystematic Risk

We measure risk by level of stock volatility. It is measured by Standard Deviation. If any stock is more volatile during a period it is assumed more risky. Modern portfolio theory has revealed that diversification reduces risk to a specific point. After which diversification has no value. After that specific point diversification does not work.

Achieving Ideal Diversification

Modern portfolio theory does not suggest any one number that is ideal to hold for diversifications. It is all about your selection of portfolios. It is said earlier that portfolios must be negatively correlated. It means that they should move opposite to each other in terms of size, industry, country or market over various periods. There is a need to allocate your portfolio mix some percentage and diversify it into different categories.

Mutual Funds

Mutual funds are specific to various sectors. Mutual funds and stock prices are highly co related in the industry. Mutual funds usually are acquired directly from Fund Company and indirectly from a sales agent, i.e. banks, life insurance companies etc. Mutual funds are distributed by underwriters and underwriters through broker distribute shares.

Conclusion

Diversified portfolios help to reduce unsystematic risk also called non market risk. It is assumed that non market risk diminishes with addition of more stocks to portfolio. It must be cleared in our minds that diversification does not eliminate market risk also called systematic risk. Risk brings equal rewards too. Higher the risk higher may be return. This way Investors are compensated for taking risk. It is important to buy stocks that are different from each other. It says that their returns must move in opposite direction to offset the losses andmaximize profits.  We can not assign limit or quantity of stocks for portfolio mix. But number of 20 is considered better for diversifying portfolio mix.

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