It means that diversification is a strategy that aims to reduce losses and increase profits by allocating investment funds across different investment activities and diversifying your investment between different sectors.
Diversification is essential in investing because markets can be volatile and unpredictable, and by diversifying your portfolio, you reduce the consequences of false expectations and trade rationally away from risk. Investments in many ways, and you can diversify your investment by buying shares in different companies, asset classes, and industries.
There is a famous rule in investing that says: “Don’t put all your eggs in one basket” because in the event of a sharp drop in stock prices and the financial markets suffer a severe crisis or a severe blow, you may lose a large part of your capital, for example, from He invests all his wealth in the oil sector. He will lose everything if the oil market collapses. On the other hand, his profits will remain limited if it performs well. The absence of diversification leads to excessive risk and insufficient gain, while the presence of diversification guarantees that you will not risk all your eggs in one basket but rather Distribute it into many different baskets depending on how much variety you’ve made.
You can diversify your investment through different types of companies and industries, for example, investing in shares of Apple, Microsoft, and Google, they all fall under the field of technology, and for further diversification, investments in other industries can be included such as stocks related to the healthcare sector such as Pfizer or investing in Shares of Chinese companies such as gaming and technology company Tencent and phone and technology company Xiaomi, or investing in the cryptocurrency sector.
But the fact that diversification is a “double-edged sword” should not be ignored. Although it has many advantages, this does not cancel out that it has disadvantages. The more portfolio holdings, the longer it takes to manage and the more expensive it. Most importantly, the investment distribution strategy applied by diversification reduces Risks and rewards, too.
Remember that no particular investment consistently outperforms others all the time. That is why diversification can help the investor manage risk and reduce the volatility of asset price movements. However, risk cannot be completely