Tuesday, October 28, 2008

Do you have a diversified portfolio?

Have you worked in a team? A team may contain people with different set of skills. Each one of them bring a unique value to the effective functioning of the team. Same goes with stocks. You need to build a portfolio that has a "mix" of stocks from different market segments. That way, if one of those segments is adversely affected, the other stocks can still continue to do good. Portfolio is all about minimizing risk and diversification. During tough times, diversification really helps.

Let us take for example you've invested all your money in Semiconductor business. If a market analyst predicts that the "semiconductor market" is going to be really dull for the next few years, your investment would loose its value all of a sudden. On the contrary, if you have built a diversified portfolio spanning tech, energy, finance, commodities etc., your investment value would not be eroded.

Building a diversified portfolio is like constructing multiple strong pillars/columns for a multi-storied building. Even if one of them goes bad, the others would be holding the structure. It would give you enough time to repair or replace the bad columns.

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