Finding a balance between returns and risk is a challenge investors face. That’s why diversification is a useful approach that any investor profile can follow.
In the financial world, investing arouses a lot of interest among lots of people, regardless of wealth or income. They all have the same objective: make returns from the market. But, as markets can be fickle, there’s no magic formula for bountiful investing. Risk is an important thing to consider when investing.
In the past, because investors generally focused on finding high-return opportunities, without too much consideration for risks, they often invested in assets that could cause them to lose all their money. In 1952, US economist Harry Max Markowitz revolutionized investing when he published an article arguing that risks and returns are equally important. He suggested an approach to help reduce financial risk: diversification. Markowitz’s momentous theories earned him the Nobel Prize in Economic Sciences in 1990.
In general, to diversify is to choose more than one thing; in investment, it means apportioning funds among various assets. If one asset takes a loss, the money invested in the others won’t be affected.