According to the businessman Eitan Eldar, investment diversification generally serves as the basis for investment in the capital market, which can reduce the level of risk and the amount of loss involved in investments. This can be seen as a concentration of investments, or in other words “putting all your eggs in one basket”, which considerably increases the risk level and the gravity of the potential loss. In fact, says Eitan Eldar, investment diversification through various channels in a judicious and wise way, can reduce the volatility of a portfolio and stabilize it.
Investment diversification – unsystematic risk diversification
Any investment in the capital market is affected by two major types of risk – systematic and unsystematic. Systematic risk is often unavoidable, as it is affected by both the overall economy and the financial market. On the other hand, unsystematic risk, caused by specific consequences to the investment, can certainly be prevented or reduced by diversification of investments. This diversification, says Eitan Eldar, provides diversity in the various investments so that a particular alteration in invested securities, will generally only have a moderate effect, if any, on the fluctuation of other securities.
Protection against fluctuations in the capital market
Investment diversification includes investments in various fields such as bonds, shares, ETFs, mutual funds, various options, and deposits, which are additionally spread out over various stock exchanges. Investment diversifications that are not significantly correlated reduce the volatility of the portfolio and provide investor protection from losses. Eitan Eldar explains, there is very little likelihood that an Israeli share that goes down will affect the bond from the Australian Government.
Increasing chances of profit with investment diversification
Beyond protection and reducing the level of risk that investment diversification provides, it also significantly increases the chance of profit. It works similarly to sweepstakes, where the prospect of earning increases with every additional competitor, as opposed to the chances of winning when betting on one horse. However, it is important to note that the chances to profit with a diversified portfolio are, in most cases, greater with long-term investments, and lesser with short-term investments such as day trading.
The art of investment diversification
It is important to note that building a portfolio and intelligently diversifying it is an art form that can be improved upon with time and experience. Behind this, explains Eitan Eldar, there are theories and many different strategies. Every person must learn and identify the right tools for their needs, investment assignments, way of life and nature.