Diversification

Diversification is one of the widely used risk management technique that combines a wide variety of investments within a portfolio. It is basically designed to minimize the impact of any one security on overall portfolio performance. Diversification is probably the best way to reduce the risk in a portfolio.

A good investment portfolio is a blend of a wide range of asset class. Different securities play differently at any point in time, so with a blend of asset types, entire portfolio does not experience the impact of a decline of any one security. When a stocks in portfolio goes down, you may perhaps still have the stability of the bonds in well built portfolio. All sorts of academic studies and formulas demonstrate importance of diversification, but it is actually just the simple custom of not putting all your eggs in one basket. Spreading your investments across various types of assets and markets, will reduce the risk of the portfolio getting affected by the unfavorable returns of any single asset class.