In the investment space, you will hear the word ‘diversification’ a lot! Diversification is where you buy many stocks to spread your risk. The idea is that if you own a small volume of multiple different stocks, then the probability that they all drop in value is lower, so therefore, your risk is also lower.
However, if you own a high volume of a small amount stocks and only a couple go up in value, then the stocks that have lost value will bring down the overall (average) return on your portfolio.
Excessive diversification is for investors that aren’t yet confident enough in their investment ability. It’s often better to focus on a select 10-20 stocks that you are interested in, because this will mean you’re more interested in keeping up to date with the stock and be more attune to when it’s time to buy or sell. This helps to diversify your portfolio without diluting your returns through too much diversification.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
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