Diversification is a risk-management strategy that mixes a wide variety of investments within a portfolio.
What Is Diversification?
Diversification is a risk-management strategy that mixes a wide variety of investments within a portfolio.
Portfolio holdings themselves can be diversified across asset classes and within classes, as well as geographically, through investing in foreign markets as well as domestic markets. Keep in mind that diversification limits portfolio risk but can also mitigate the performance in the short term.
In other words, rather than concentrating money into a single company, industry or asset class, investors can diversify the investments across a wide range of different companies, industries and asset classes.
When the funds are divided across large and small companies, both at home and abroad, in both stocks as well as bonds, you can avoid the risk of having all of your assets in a single location.
This can be seen in the cryptocurrency world as a way of investing in more than one cryptocurrency. In other words, if you only invest your money into BTC, and Bitcoin’s value drops, you lose money; however, if you have investments in BTC, ETH, XRP, DOGE, ADA, DOT, and so on, and BTC’s value drops, but the other currencies go up in value, your losses are balanced out or you gain profits as a result by not putting all of your potential gains in a single basket.
Diversification is used in order to minimize investment risk. Since the future is uncertain, especially in the highly volatile world of cryptocurrency, the value is always changing and as such, we need to diversify the investments among different currencies in order to not get exposed to certain risks.
Another positive aspect of diversifying your investments is the fact that you can learn about different coins as well as projects, and as such, achieve better performance in the long run.