Investment brokers and financial experts preach diversification to their clients and anyone else who will listen because it mitigates potential damages over time. When investors put too much into a particular sector, that sector could make or break them. Investors don’t want to be married to any particular wrinkle of the market; they want their fingers in many sauces at once to minimize their risk and maximize their profit potential. Diversification does this by spreading out the cost and value of various stocks and commodities throughout the market. It’s essentially a “don’t put all your eggs in one basket” approach. Different sectors in the overall marketplace have a habit of rising and falling quickly. By spreading investment dollars around to as many different sectors as possible, you can avoid the most damaging effects of a sector crash.
Investors tell their clients to be patient for a reason. Long term profits and security are hard-won and take a long time of planning and gradual buys and sells across several different sectors to avoid getting creamed by a downturn. This simple concept has saved the careers of many investors and brokers and has kept many clients out of trouble over the years. This is why all investors know now to keep their clients away from putting too much faith in one particular sector.
Preston Fontenot works with many clients to develop diverse portfolios designed to stay away from putting all of their eggs in one basket and allow them more flexibility over the long term. He is a former member of the professional real estate community.