diversification

investing for beginners

Share

Share on facebook
Share on twitter
Share on linkedin
Share on email

what's in this lesson?

Remember your friend who put a bunch of money into bitcoin a couple years ago and had to sweat out their money every single day because the price was changing so much? Let’s not be that guy. Let’s…DIVERSIFY!

diversification

investing for beginners

Share

Share on facebook
Share on twitter
Share on linkedin
Share on email
  • Overview
  • Transcript
  • Resources

diversification

investing for beginners

Remember your friend who put a bunch of money into bitcoin a couple years ago and had to sweat out their money every single day because the price was changing so much? Let’s not be that guy. Let’s…DIVERSIFY!

What is Diversification?

Okay so we’ve played around with this word a bit–diversification–but we want to dive deeper into why it’s so important, and how it needs to be central to your investing strategy.

Diversification is spreading your money around so you’re not gaining or losing money on the backs of a single investment that’s subject to more risk. But it extends beyond that.

 

A Diversification Example

Let’s say I’ve invested $100 in the stock market, spread across a few companies. You might think that makes me diversified and, in a way, you’re right. Let’s take a look at the companies I’ve decided to invest in.

Square, Paypal, and Shopify. These are three different companies, so in a way I’ve decided to spread my risk around a bit–certainly less risk than if I had only invested in one of these companies. But, if you take a closer look, all three companies are based in the US, are in the same industry (mobile payments and point of sale solutions) and would be subject to the same set of macro-risks and industry wide risks. While I’ve put money in a few different companies, this portfolio wouldn’t be diversified because I haven’t reduced my exposure to key risks.

Conversely, imagine a scenario where I’d invested in Square, but also in a pharmaceutical company, a green energy company, a gold mining company, and a South American telecom company. That would be a diversified portfolio because macro-risks that affect one of these companies would probably not affect the other companies in the same way.

 

Source(s): Forbes

what's in this lesson?

Remember your friend who put a bunch of money into bitcoin a couple years ago and had to sweat out their money every single day because the price was changing so much? Let’s not be that guy. Let’s…DIVERSIFY!

Transcript

What is Diversification?

Okay so we’ve played around with this word a bit–diversification–but we want to dive deeper into why it’s so important, and how it needs to be central to your investing strategy.

Diversification is spreading your money around so you’re not gaining or losing money on the backs of a single investment that’s subject to more risk. But it extends beyond that.

 

A Diversification Example

Let’s say I’ve invested $100 in the stock market, spread across a few companies. You might think that makes me diversified and, in a way, you’re right. Let’s take a look at the companies I’ve decided to invest in.

Square, Paypal, and Shopify. These are three different companies, so in a way I’ve decided to spread my risk around a bit–certainly less risk than if I had only invested in one of these companies. But, if you take a closer look, all three companies are based in the US, are in the same industry (mobile payments and point of sale solutions) and would be subject to the same set of macro-risks and industry wide risks. While I’ve put money in a few different companies, this portfolio wouldn’t be diversified because I haven’t reduced my exposure to key risks.

Conversely, imagine a scenario where I’d invested in Square, but also in a pharmaceutical company, a green energy company, a gold mining company, and a South American telecom company. That would be a diversified portfolio because macro-risks that affect one of these companies would probably not affect the other companies in the same way.

 

Source(s): Forbes

Additional Resources

How's it going?

1 = not helpful at all; 5 = extremely helpful

join the onomy fam!

Subscribe for free weekly lessons, pro tips, and memes straight to your inbox. We’ll also let you know about 🔥 giveaways and expert events.

By subscribing, you agree to our Privacy Policy and Terms of Use

 
Already a member? Log in

Sign up for course updates!

* indicates required
What topic(s) are you interested in?

By subscribing, you agree to our Privacy Policy and Terms of Use. You can unsubscribe at any time by contacting onomy or using the unsubscribe link.

lessons