Investor Diversification - An Individual Decision For The Small Investor
Any investor who has done some research is well aware of the advice diversify your investment portfolio to minimize your risk. It makes sense; we as cautious humans quickly understand the old proverb "Don't put all your eggs in one basket". But when it comes down to the dollars and cents, does investor diversification benefit the smaller investor?
Depending where you are in your investment life your acceptance of risk, known as your risk profile, will change. As a young parent your risk level may be low - it is hard enough to save the money, you can't afford to lose it. As your move into your main earnings years you are a little more risk attuned. You have the ability to weather any particular losses and time to make up those losses. When you have reached retirement and are living off those investments your risk profile may be low again. In all those stages the level of portfolio diversification is likely to be different.
Diversification, by its very nature, means that while our risks are minimized our exposure to profits can also be minimized. The money we have tied up in fixed interest is not available to take advantage of a red hot stock picks or a booming property market.
Another problem for the small investor is the smaller pool of funds he has to play with. It would be great to have a portfolio of property, a wide range of stocks and bonds, bank deposits and investment art. But to buy into all of these areas the small investor risks having such tiny investments in each that it isn't worth the effort.
There are many instances where specializing have paid off, look at Henry Ford or Bill Gates, neither of these diversified their markets. But there are just as many examples of people who have not diversified and have been burnt.
In the end each small investor has to assess his risk profile and manage his investor diversification appropriately. - 23210
Depending where you are in your investment life your acceptance of risk, known as your risk profile, will change. As a young parent your risk level may be low - it is hard enough to save the money, you can't afford to lose it. As your move into your main earnings years you are a little more risk attuned. You have the ability to weather any particular losses and time to make up those losses. When you have reached retirement and are living off those investments your risk profile may be low again. In all those stages the level of portfolio diversification is likely to be different.
Diversification, by its very nature, means that while our risks are minimized our exposure to profits can also be minimized. The money we have tied up in fixed interest is not available to take advantage of a red hot stock picks or a booming property market.
Another problem for the small investor is the smaller pool of funds he has to play with. It would be great to have a portfolio of property, a wide range of stocks and bonds, bank deposits and investment art. But to buy into all of these areas the small investor risks having such tiny investments in each that it isn't worth the effort.
There are many instances where specializing have paid off, look at Henry Ford or Bill Gates, neither of these diversified their markets. But there are just as many examples of people who have not diversified and have been burnt.
In the end each small investor has to assess his risk profile and manage his investor diversification appropriately. - 23210
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posted by X - Men @ 8:42 AM
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