How important is diversification?

How much do you want to put your eggs in one basket?  Even a few baskets?

 

Diversification spreads your risk among many different investments.  Appropriate diversification involves investing in hundreds of different companies across many industries and sectors.  It usually involves investing in a number of different funds, unless you are mega wealthy and can buy the stock outright of hundreds of companies (this does not take into account the higher investment fees for doing that, of course).  If one company goes sour, the impact on your total investment is minimal.  If a whole sector takes a hit, the other sectors can mitigate the damage.  Diversification does not protect you from systematic risk, however – if everything tanks, such as in the downturn in 2008-2009, then so will your investments.

Also see this post about diversification

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