Chapter 2: Basic Investment Principles
What is diversification?
Being diversified in investment terms means spreading your cash across multiple industries that respond differently to economic changes. The goal is to reduce your risk while still allowing for potential returns.
The Science of Diversification
There are multiple levels of diversification for your portfolio. On the lower end, it means owning more than one stock. On the higher end, it involves owning stocks from different markets. Depending on your desired risk and return potential, you need to decide the level of diversification that suits you.
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The main benefit of diversification is risk mitigation; if one industry encounters problems, it won't impact all your stocks. However, this works both ways. For example, if there's a boom in an industry, like AI benefiting chip manufacturers, companies like Nvidia will gain more than companies like Duke Energy. So, if you've split your money between these stocks, you'd earn less than if you only owned Nvidia.
Just like everything else you have to compromise
Do it the right way
Make sure you diversify correctly by minimizing overlap between industries. If you want extra security, split your stocks between different markets. At Wealthy Workers, we believe it’s sufficient to be semi-diversified across industries to balance risk and potential returns, as being too diversified might hinder our ability to outperform the market.
