Diversification

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* Credit or Default Risk - Credit risk is the risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations. This type of risk is of particular concern to investors who hold bonds in their portfolios. Government bonds, especially those issued by the federal government, have the least amount of default risk and the lowest returns, while corporate bonds tend to have the highest amount of default risk but also higher interest rates. Bonds with a lower chance of default are considered to be investment grade, while bonds with higher chances are considered to be junk bonds. * Business Risk: This is the risk that issuers of an investment may run into financial difficulties and not be…show more content…
How long you intend to invest If you were investing for 12 months or less, a financial adviser would probably recommend you keep your money in cash or a term deposit. That way you wouldn’t be subject to possible short term fluctuations. But it would also mean you wouldn’t diversify your investment. Your risk profile As a general rule, how you diversify your investments has a lot to do with how well you understand the relationship between risk and return and the level of risk and return you’re looking for. How much money you have to invest If you are investing just a few thousand dollars it may not be cost effective to diversify your money across more than one asset class as the transaction fees may eat up any earnings you make. Managed funds are an effective way to diversify with small and large amounts of money, either as a single investment or as a way of investing ongoing savings ------------------------------------------------- Advantage: Risk Reduction When your assets are widely diversified, your portfolio tends to perform in a similar way to the market as a whole. If you own stocks in 20 different areas and one of them takes a dive, it's unlikely that your portfolio will suffer terribly. Diversification is the best way to increase the stability of your investments and decrease your risk of losing money in the event
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