How do you incorporate portfolio diversification in your investments?


Quick Answer

Portfolio diversification can be incorporated into an individual's investments by using various types of stocks, bonds and other financial instruments, according to Investopedia. Diversification is a way of managing risk that experts believe results in a higher overall return. In a diversified portfolio, positive events that affect some financial instruments balance negative events that affect others.

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Full Answer

A portfolio that includes 25 to 30 different types of stocks often yields the best level of risk reduction, Investopedia notes. Adding more types of financial instruments beyond that level can reduce risk further, but the ratio of cost to benefit diminishes. Foreign securities in particular can reduce risk further because they are not always tied to economic declines and other events in the United States.

Diversification helps reduce the risk of significant financial losses due to changes in the economy or in particular types of securities, according to Investopedia. Using a mix can help keep an overall portfolio stable even if the value of certain components drops suddenly. The types of investments in a diversified portfolio can vary according to the age of the investor, financial goals and other factors. Mutual funds, which are professionally managed pools of stocks and bonds, are popular as of 2014 because many individual investors cannot afford to diversify their portfolios sufficiently.

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