Investing - the Importance of Diversification

August 15, 2008 | By Money Papa |

One way to diversify your investments is to purchase various stocks in many different industries. Alternatively, you could purchase bonds, invest in various money market accounts, or even in real estate. The key is to invest in several different areas – not just one.

There has been a great deal of research done over time, that consistently shows that in investors who have diversified portfolios usually see more consistent and better returns on their investments than those who just invest in a single thing. By investing in several different markets, you will also be at considerably less risk.

For example, if you had invested all of your money in one stock - lets say Enron, and that stock took a significant plunge - as Enron did(!!) then you will find that you would have lost most if not all of your money. On the other hand, if you had invested in ten different stocks, and nine were doing well while one plunged, you would still be in reasonably good shape.

A good diversification will usually include stocks, bonds, real property, cash, and todays hottest investment - gold - but this diverse strategy will take time. Depending on how much you have to initially invest, you may have to start with one type of investment, and invest in other areas as time goes by.This is okay, since if you can divide your initial investment funds among various types of investments, you will find that you have a lower risk of losing your money, and over time, you will see better returns.

A simple way to diversify your portfolio is to buy gold coins. Gold is a very attractive propsition just now as the spot price nudges every closer to $1000 an ounce, and returns of 30% a year are not unheard of. Gold coins are a simple, safe and low cost way to add to your portfolio as they traditionally sell at good premiums over the market price of gold because of their looks, history and collectability. Krugerrands, Sovereigns, Doubloons and Gold Eagles, among many others are very popular choices.

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