by Wayne Ramsey

Created on: May 22, 2010   Last Updated: October 01, 2010

Diversification is possibly one of the most important things you can do when investing.  If you don't diversify your portfolio you are potentially setting yourself up for massive losses from which you may not be able to completely recover.  To better understand what I am talking about, it is important that you understand what it means to diversify when it comes to investing.

Diversification is simply the act of moving around your money to ensure that you are invested in a variety of different investments.  The reasoning behind doing this is to protect you from unpredictable events.  If you were to invest entirely in a fishing company that operated out of the Gulf of Mexico and suddenly they went out of business because the fish they used to harvest is now protected you could lose ALL of the money that you had invested in them.  So if you placed all of your money into that company you would lose it all and would have to start over.  If you had diversified, you would have only lost a small piece of your overall portfolio.

Another way to diversify is by ensuring that you have a variety of different types of investments.  This could mean having a healthy mix of stocks, bonds, funds, and even gold.  You do this in order to spread things out a little more to ensure that you are as heavily impacted by major downturns in particular types of investments. 

And the final thing that you can do to diversify is to pick companies that are in different sectors within each type of investment.  This means that you wouldn't put all of your money into Oil/Gas products and companies.  You would buy some of Oil/Gas, some technology, some medical, and simply spread it around.  By diversifying in all three of these ways you give yourself huge potential to avoid major loss.  While you can still lose the idea is that you aren't going to lose as much as you would if one individual company were to have major issues.  The odds of this many companies going out of business from this many different sectors is highly unlikely, thus securing that you will maintain at least some of your portfolio. 

The other benefit to diversification is that you aren't relying on a single company to go up in value.  With diversification the potential for you to be invested on stocks that make a major run or ones that announce dividends is much higher than if you were invested in just  a single company.  This means that you are more likely to see positive moves on your account.  Just keep in mind that even with diversification and the benefits of it that you could still lose money.  The goal should always be to plan out your picks and ensure that you do solid due diligence in choosing each and everything that you invest in.  The harder you work picking your investments the more likely it is that you'll find ones that are actually going to perform and grow your portfolio down the road.

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