Why Financial Diversification is Important

Financial diversification simply lets you apply the age-old adage of "not putting all your eggs in one basket." In practical terms, it means that you take your savings and spread your savings among different type of investment options. This type of investment does take some work and it will take some planning on your part.

This leaves the question of why. Why would anyone put forth the time and energy to diversify their portfolio? The answer comes down to risk. Financial diversification is designed to help minimize overall risk in order to gain long term, steady returns.

If all your eggs are in one basket and the basket happens to get run over a car, you may be left with nothing. Similarly, if you were one of the ones who invested their entire future of savings in Enron, you may be working a second or third job to pay your bills in retirement.

If you want to minimize your financial risk, it is time to diversify. Some tips to help you achieve this goal:

Split your portfolio up among 3 or 4 different industry. Do not put all of your savings into real estate or oil or the newest "widget" your neighbor created. Making this type of split helps you to weather the downturns in one industry without seeing your savings substantially drop.

Choose different types of investments. Some types include stocks, bonds or cash. You can put money into a savings account, which is very stable because of FDIC insurance, but has a lower interest rate. The stability of bonds and stocks really depend upon the type of stock or bond you wish to purchase. It is important to research your specific investment to make sure you know all the pros and cons about your choice.

Do not limit to one only. If you choose to invest in stocks and bonds, make sure you purchase more than just one stock or bond. That way, if the one company in which you own stock declares bankruptcy, you are not hit as hard as you would be if you owned stock in multiple companies. If you are unsure of how to select stocks, then check out mutual funds.

Financial diversification can take some time for research and some effort to understand your options. Although many people handle their own investment choices and manage their own portfolios, others choose to find a financial manager to do that for them.

No matter the amount you have in your nest egg, financial diversification provides a safer path to a more comfortable future.