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Mutual Fund Portfolio Diversification

Diversification, the spreading of money among several investments, represents the best choice a beginner investor can make. It is the wisest decision you can make in case you lack the qualities or experience of making sound judgments on the intrinsic value of a company. By diversifying among the stocks of companies from different sectors and industries you greatly decrease the chances of incurring high losses, since a drop in one stock may be compensated by an increase in another. On the other hand, if you own stocks from one sector, let's say the financial, you are not diversifying. This is so, because entities of these sectors are susceptible to one and the same risk. Therefore, if the financial sector in this case experiences a collapse, your whole investment portfolio will suffer.

Diversification Portfolio Advices

By keeping up with the following advices, you will ensure yourself a greater degree of diversification.

  1. Avoid fund family concentration

    There are many examples from the mutual fund history that tell for the market timing of big traders that resulted in the damage of small investors' portfolios. This was allowed by many firms, which provided the opportunity to affluent investors to take advantage of the funds, by breaking whatsoever ethical rules. In order to reduce the eventual negative effects of such internal and localized problems, diversify your money among as many companies as possible.

  2. Avoid owning industry or sector concentrated mutual funds.

    By purchasing a mutual fund that heavily invests in companies from one industry you destroy your chances of diversification. If you nevertheless buy shares of such a mutual fund, try not to invest a big portion of your resources in it. Avoid rank speculation by making interest rates bets under bond funds.

  3. Take advantage of the many mutual fund opportunities

    Even though it is advisable to set the basis of your investment portfolio in domestic equities, consider the many other mutual fund types that provide beneficial returns that have been adjusted to different levels of risk. Among your available alternatives are: international funds, fixed income funds, convertible and arbitrage funds, real estate funds and etc.

Remember, that diversification is the key toward insuring yourself against high losses incurred due to great disturbances in the specific industry and sector!

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