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Created with Fabric.js 1.4.5 Portfolio Diversification Definition;When you have 2 stocks and ifthey do not go up at the samerate, it becomes a diversified portfolio and will have less risk. How to diversify your portfolio: 1. Spread the wealth.Equities are wonderful, but don't put all your investment in one stock, or sector. 2. Consider index or bond funds. Consider addingindex funds or fixedincome funds to the mix. 3. Keep building. Add to yourinvestments on arelgular basis. 4. Know when to get out. 5. Keep a watchful eye on commissions. A portfolio that is not diversified within asset classes may experience different levels of risk. If you haven't already done so, choose a mix of stocks, bonds, and short-term investments that you consider appropriate for your investing goals. EXAMPLE: If you invest all $1 million in Company XYZ stock,and the stock goes from $4 to $2 per share, your portfolio loses 50% of its value and you end up with $500,000. Now lets assume that you invested $500,000 in Company XYZ stock and $500,000 in Company ABC stock. The Company XYZ stock then goes from $4 to $2 but the Company ABC stock, which has very little in common with the Company XYZ stock in terms of factors that affect its price, goes from $6 to $7.50. The result is that $500,000 of your initial investment is now worth only $250,000 (this is the part invested in Company XYZ stock, which lost 50% of its value) but the other $500,000 is now worth $625,000 (this is the part invested in Company ABC stock, which rose by 25%). In this scenario, the portfolio goes from $1 million to $875,000. Still a loss, but not as bad as the $500,000 loss you would have suffered by putting everything in Company XYZ stock. Why portfolio diversification is important: It helps reduce risk in your finances and is an important part of making sure that your financial goals aren't derailed by the unexpected.
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