Portfolio Diversification

What is portfolio diversification? Why do you need it? Today we will answer these questions as we dive deeper into the stock market.

Diversification in the stock market specifically means buying stocks from different sectors of the market, such as technology, automobile, or real estate. This is important because rises and falls in the market tend to focus on one specific industry. For example, if there is a massive failure in designing the next 5G wireless network, not only will the stock price fall for Verizon and AT&T, but for Apple and many other technology businesses, as 5G would affect the entire market sector of technology. Thus, it is likely that a lot of technology stocks will fall. If you bought shares of these companies, you will lose money. This is why diversification is important. It is like the idea of putting all your eggs in one basket. If the basket drops, all your eggs will break. If all of your money is in the technology industry and it drops, you lose a lot of money. If you invest in real estate and travel, these major setbacks and falls in the technology portion of the stock market will not have such a major impact on you.

Building portfolio diversification allows you to be more resilient against fluctuations in the stock market. It also allows you to draw benefits from many different parts of the stock market. If the real estate market rises, you get profit, and if the technology market rises, you get profit from that too, and so on and so forth. It gives extra sources of income from which you can profit, as well as safety, knowing you will be relatively safe from a market crash in one individual part of the market.