You need to diversify your investments to maximize returns while minimizing risk. Everyone knows that. See: Efficient Frontier. It can get hard, though, because companies can share characteristics that turn out to be obvious, but are so fundamental they can hide in plain sight.
Take geography. You invest in a promising app developer, a medical device company, an insurance giant and oil producer. Pretty good industry diversification.
But it turns out all those companies are headquartered in the same few blocks in Manhattan. Meanwhile, that part of New York has suffered an outbreak of a hallucinogenic black mold, which has caused every executive related to your portfolio to make erratic decisions, and to bark like seals during investor conference calls.
Now all the stocks in your portfolio are plummeting. A lack of geographical diversity coming home to roost.
In real-life practice, geographical diversity involves putting money in different countries and global regions. So don’t just buy stocks in U.S. companies. Look for firms centered overseas as well. Russia. China. Japan. New Zealand. Belize.
Well, maybe diversify to Belize by buying some beach-front property there.
Related or Semi-related Video
Finance: What is a Diversified Mutual Fu...20 Views
finance a la shmoop what is a diversified mutual fund? all right people
listen up it's lots of investments stocks bonds exposure to risk and reward [Risk and reward punch man in face]
everywhere energy, telecom, insurance, real estate, banking, chemicals, tech, retail not
enough diversity yet well those are just sectors or industries and there's a
whole bunch of them what about geography geographic diversity the US, Russia, China
Europe someday maybe Mars Elon what do you think well maybe exposures to [Elon Musk floating in space]
different currencies or commodities cycles as the diversity you seek hmm
well that's diversity Benetton eat your heart out so the bigger question is why
would you want such diversity? well the idea is that you mitigate risk by being
diverse the don't put all your eggs in one basket thing if one investment goes [Value of investment graph appears]
bust well at least you have plans B C and D to fall back on and if this is
grabbing you check out our videos on efficient markets theory for more on the
subject or maybe diversify your knowledge and watch all of our finance
videos food for thought and you know please click on the ads that we got to [Man holding begging sign]
eat around here
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