{"id":13998,"date":"2021-03-31T06:17:53","date_gmt":"2021-03-31T06:17:53","guid":{"rendered":"https:\/\/www.mymoneysouq.com\/financial-blog\/?p=13998"},"modified":"2021-03-31T06:17:54","modified_gmt":"2021-03-31T06:17:54","slug":"investment-diversification-how-does-it-work","status":"publish","type":"post","link":"https:\/\/www.mymoneysouq.com\/financial-blog\/investment-diversification-how-does-it-work\/","title":{"rendered":"Investment Diversification – How does it work?"},"content":{"rendered":"\n

Every individual who is new to the area of investments would have heard about Investment Diversification. The first advice given by any wealth manager or expert investor would be to diversify the investments. The diversification of investments is a technique used to experience fewer risks in any investment portfolio. It is a concept where you can invest parts of your money in different areas.  <\/p>\n\n\n\n

Check: <\/strong>Common Investment Mistakes One Should Avoid<\/strong><\/a><\/p>\n\n\n\n

How does Investment Diversification Work? <\/strong>
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One aim every investor has is to reduce the risk of their investment. Usually, the nature of investments is volatile. No one can predict what\u2019s going to happen next; they can just assume taking past performance into consideration. When an investor is putting their hard-earned money in any particular investment, they need to be prepared with anything either loss or profit. 
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In order to reduce the risk of an investment, it is suggested to invest in different portfolios as in, if you are investing AED 25,000, rather than investing all the money in a single portfolio say stocks, you can spread it in other portfolios as well like mutual funds, fixed deposits, gold, etc. <\/p>\n\n\n\n

You can invest 60% of the investment amount in stocks, 25% in real estate, 10% in deposits and 5% in any small-term investment. Assume your stocks have gone up and the real estate market has fallen. Then you\u2019ll have profits from the stocks to make up for the loss in real estate or any other investment. This is how diversification of investment work. 
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Each investment portfolio has its own advantages and disadvantages which work differently according to the atmosphere in the market. There can be an investment that is working great at that particular time but it is not predictable how economic conditions can work making it work adversely. Hence when there is another portfolio working on a positive note, it will compensate for the loss overall.  <\/p>\n\n\n\n

Related: <\/strong>Different investment options for expats in Dubai<\/strong><\/a><\/p>\n\n\n\n

Diversification vs Asset Allocation <\/strong>
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Asset Allocation<\/strong> – As the name suggests, it is the process of allocating money into different asset classes. 
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This might sound similar to investment diversification but the simple difference between investment diversification and asset allocation is the strategy that is asset allocation is investing in different asset classes while diversification is how much percentage of your investment amount needs to go in a particular asset according to personal factors like age, risk appetite, investment goal and also market conditions. 
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Asset allocation is allocating the money into different asset classes like stocks, bonds, mutual funds, fixed deposit, gold, real estate, etc. On the other hand, diversification is the right mix of these assets and investing.   
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Advantages of Investment Diversification <\/strong>
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Diversification is one of the important principles of investment. It is because you don\u2019t have to rely completely upon a single investment. The advantages of investment diversification are, <\/p>\n\n\n\n