Benefits of portfolio diversification
Diversifying your portfolio is one of the best things you can do to lower the overall risk of your holdings. Diversification removes non-systemic risk, leaving only the overall risk of investing in the stock market.
Well-diversified portfolios, which are ideally diversified across companies, industries, and geographies, tend to consistently gain value over time. They are also less volatile.
The failure of any one company, the decline of any industry, or poor economic conditions in any single geographic area are offset by the gains of other holdings in a diversified portfolio.
Potential downsides of diversification
While diversifying your portfolio is recommended, owning a large portfolio of stocks can be unappealing for several reasons. Aside from the administrative burden and the possibility of high trading fees, you may not want to have to choose individual stocks.
Buying shares in an exchange-traded fund (ETF), which holds a collection of stocks, can be an excellent option that gives you instant diversification. Some ETFs hold hundreds of stocks in their portfolios. It should be noted that your portfolio will perform about just as well or poorly as the market or index does.
