Diversification is very useful tool for investors, fund managers, financial planners and individuals. When market is in a boom situation we can not sell stock lower than the purchase price. Obviously no one is certain about market movements. Any thing can happen at any time. So we can not ignore importance of diversification.

Need Of Diversification

Diversification is an art and one must specialize in it. It helps us to tackle and protect against the adverse effects of uncertain events.  All investors react to market events at time when about 80% damage is done. Holding a well diversified portfolio is essential for investors and traders so that they may be unaffected by market storms and rough weathers. Risk refers to a default level, or chances of failure. It means that there is a probability that any side of a coin can appear as outcome. Risk is measured by variance and standard deviation. Diversification protects you from the unsystematic risks associated to market or company. It reduces your degree of losses caused by market uncertainty.

It doesn’t offer any guarantee of protection from losses. It can not eliminate whole risk because some risk is associated to the market and can not be avoided as it is a part of system or market. Portfolio mix should be negatively correlated to each other in terms of returns. Coefficient correlation is a measure that is used to calculate relationship among different securities. If covariance is positive it means that returns of two securities move in same direction. Negative covariance says that returns of two securities move in opposite directions. With zero covariance returns of two securities are independent.

Random Diversification:

It a process of diversification in which portfolio is diversified according to the investments characteristics. Investors look at the expected return and industry classifications. Usually large number of securities is randomly selected. Basically it is assumed that each stock has equal investment level.

Every investor invests with assumptions of earning income, growing investment and experiencing the excitement of investment process.

Tips for Diversification

1. Spreading Your Investments:

It is a wise move that you invest in different stocks, sectors and industries. Invest in ideal companies you know and trust or use their products. Investments are spread over various portfolios with different mixture of securities.

2. Investing In Fixed Income and index funds:

Your portfolio must contain fixed income and index funds because in the long run they provide good benefits for your portfolio mix. If you wish to hedge against market uncertainty or volatility then must add fixed income funds.

3. Growth of Investments:

Your investments should increase regularly as it will ease out you against market uncertainty. Adding more stock to portfolio mix can provide you better results.

4. Watch market conditions:

Be aware of the market movements. Don’t sit back, carefully evaluate market conditions. Especially its effects on the company you have invested in. This will help you to take certain measures for your protection and growth.

5. Adopting Cheapest Source of Payments:

It is important that you must adopt cheapest sources for payments. Each company charges different prices. You should know what you obtain from your payments. Your payments may include monthly fee, transactional fee etc.

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