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be achieved in a number of ways and at varying levels of risk. One can diversify through the methods listed above or one can diversify using multiple financial instruments. Some examples of this type of diversification includes the following methods:

Low Risk Diversification:

-Low risk mutual funds such as precious metals, utilities and bond funds
-Treasury Bonds, Savings accounts, Australian Government Bonds

-Investment through IRA's, Life Insurance Policies and Certificates of Deposit

Medium Risk Diversification:

-Investment in index funds
-Diversification through middle capitalization and large capitalization companies
-Capital investment in Bonds, stocks and higher risk mutual funds

High Risk Diversification:

-Investment across a range of small capitalization companies
-Diversification through a number of risky exchanges such as foreign exchange, futures and growth sectors of the economy.

Risks Typically Associated with Non-Diversification:

When one does not diversify, one's net worth can decline dramatically. An example of this is the Tech bubble of the late 1990's and the Housing Bubble of the middle 2000's. If an investor had all their money in either of these industries after the bubble burst they could have lost a great deal of money. An economic 'bubble' does not have to burst for an asset class or industrial sector to have a correction of 10-20% because there are many integrated market forces that drive prices of financial instruments outside of abnormal pricing. While diversification does not eliminate all one's investment risk, it can present some very safe options depending on how risky the investments are.

How one diversifies is also important because as with any investment strategy there are many different ways to diversify. Some methods are better than others. For example, if one diversifies in secure and Government backed financial instruments one's risk will be lower than if diversification takes place through high risk stocks across a number of industries. Also the choice of investments one chooses to diversify with can create a combination of risk and return that is ideal for an individual investor.

In summary, investment diversification limits but does not eliminate risk. The safer the investments that are diversified, the lower the overall risk will be. Diversification can be achieved through mutual fund investing as well as through investment in multiple asset classes and financial vehicles. The benefits of diversification are well known and considered a beneficial investment strategy.

Learn more about this author, A.W. Berry.
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