How does diversification helps to limit my risk in investing?
Diversification, or spreading your assets among several investments, helps you smooth out potential ups and downs of your investment returns. Even if one investment does poorly, the others may do better, thereby potentially improving your overall return.
You can diversify your investments at two distinct levels by spreading your investments among:
- different asset classes — cash equivalents (e.g., fixed deposits),bonds and stocks and/or
- different markets — geographic regions, foreign countries, foreign currencies, industries and companies.