DEFINITION:
Diversification is the strategy of spreading investments across various assets, industries, or regions to reduce risk.
WHEN AND WHY IT’S USED:
Diversification is employed to mitigate the risk that comes from having too much exposure to any single asset or market segment. By holding a variety of investments, the poor performance of one asset is less likely to significantly impact the overall portfolio. This approach is particularly important during uncertain economic times or in volatile markets.
IMPORTANCE IN COMMUNICATION:
When discussing diversification with your financial advisor, you gain insight into how risk is managed within your portfolio. It ensures that your investments are not overly concentrated in one area, which can be reassuring during market downturns. Understanding diversification allows you to ask informed questions about how each asset contributes to the overall risk and return of your portfolio.
Moreover, clear communication about diversification helps you and your advisor evaluate potential gaps or overlaps in your investments. This ongoing dialogue can lead to strategic adjustments that improve your portfolio’s resilience, making it a fundamental topic in ensuring that your investment strategy remains robust and aligned with your goals.
EXAMPLES IN COMMUNICATION:
“Is my portfolio diversified enough across different sectors?”
“What additional steps can we take to further diversify my investments?”