Investing in many shares also known as diversification helps to minimize the level or degree of risk an investor is likely to face. In the financial markets, all stocks and shares react distinctly from one another based on various factors. The factors include the general health of the industry where the institution is dwelling in, the performance of the organization, and the general share market. There is the need for an investor to have a well-diversified or balanced portfolio to counter the ups and downs which are likely to be experienced in the securities markets. (Arouri, Jawadi, & Nguyen, 2010). For instance, an investor may decide to invest in different classes of assets such as bonds, stocks, equity investment, and money market shares.
Security bonds and stocks have been well-known to thrive well when there are low-interest rates and inflation. Therefore this means that when the interest rates are low, the investor will benefit from bonds and stocks and when interest rates are high he will benefit from equity investment and money market shares. Investing in a variety of shares in not a surety against losses but it is one most fundamental ways of minimizing short-term risks and giving the portfolio time to expand as time goes by. (Aldridge & Krawciw, 2010). Apart from reducing losses, diversification helps the investor to reap maximum returns since risk is less. Diversification of portfolio serves as the best alternative, especially for the retirees. Investing partially in various types of shares will help to preserve the investor's wealth since the losses will be minimized.
Aldridge, I., & Krawciw, S. (2010). The Quant investor's almanac 2011: A roadmap to investing. Hoboken, N.J: Wiley.
Arouri, M. E. H., Jawadi, F., & Nguyen, D. K. (2010). The dynamics of emerging stock markets: Empirical assessments and implications. Heidelberg: Physica.