Tuesday, February 2, 2010

4 kinds of portfolio diversification...

It is said "Never put all your eggs in one basket."

This logic makes Diversification of your investment logical! But diversification can also be in various ways.

I have picked the four most prominent types of diversification.

1) Within same Sector but spread across time period

2) Within same Sector in one go

3) Across Sectors and spread across time period

4) Across Sectors in one go

The first & second have got sector-specific risk still uncovered!
The second & forth have got market-specific risk uncovered.
The third is a true diversification where the risk of getting caught in sector-specific or market-specific bad times is minimised!

While the first one is Immature, the second is Risky behaviour, the third is Professional and the forth one is Amateur.

Warren Buffet had said "Diversification may preserve wealth, but concentration builds wealth."

But we forget the height he was talking from!!! Only someone as pro as him can say that.

Also, the money doesn't know that it is diversified! All that matters is whether the money has been deployed and whether rightly!!

Diversification requires multiple effort but is worth it!!! If the picks are great, even diversification can match the results of "concentration" Buffet talks about!

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