The illustration above represents the relationship between the number of securities (i.e. stocks, bonds, and options) a portfolio contains and the overall risk a portfolio might face.
The optimal level of diversification within a portfolio appears to lie around the 20 mark. It is at this point that over 90% of the unsystematic risk has been diversified away. Increasing the number of securities beyond this point may lead you into trouble, as you are left with the burden of managing so many variables with little rewards from the increased diversity. Being over diversified, might see you miss an important piece of news about a firm, or it might prove to be difficult to move all of your funds out of exchanges quickly in times of economic difficulty.
In today’s world an investor has so many resources in front of them to learn the ways to invest in the most efficient and productive ways. However, did you know there are professionals out there who are trained in investing and giving investment advice? That’s right, booking a meeting with a trusted financial adviser to discuss your options can be of great benefit. Best of all most if not all financial advisers do not charge you for a meeting.
Having a diverse portfolio is of supreme importance, if you want to maximise returns while minimising risk. This involves investing in a variety of asset classes and a variety of firms from differing industries. Do note that trained professionals in the form of financial advisers are always there to help you if you need a valuable resource to lean on. This will make the process of creating the perfect portfolio a breeze. Hope you have learned something from this article today, and happy investing.