Investment diversity - what is it about? It's about risk. Just build it up. If you put all your money into one thing, if that thing collapses you loose, everything. If you put all your money into two things, one of them might fail, but both probably will not. But if both are similar they might fail together. So play this out further, the more different investments you have, the less likely everything will fail. The risk that everything fails is called Systemic Risk. The risk similar investments will fail is called Sector Risk. After these you have just the risk of individual investments. (Actually, there are many other risks, Sovereign Risk, Currency Risk etc.)
Diversity does also reduce your chance of a windfall gain. It is more likely that a single investment will skyrocket upwards than several investments will. But many big moves are the whole market moving and for those cases, having many investments will not matter much.
How do you stay diverse? Having several investments which are not related is pretty good. These investments should also not get too concentrated into just one or two places. That can happen if one investment does have a marked increase. That one investment will then be a larger portion of your total investment and consequently it will present a risk. It is wise then to sell a portion of an investment that has skyrocketed so that if that gain is temporary, you do not loose all of that temporary gain.
Copyright © 2005 Jeffrey Anton