Portfolio diversification is described by PNC advisors as the spreading of assets among multiple securities and investments. While portfolio diversification is not the Golden ticket to a perfect portfolio, there are several benefits to using several asset classes and investment opportunities.

Why Diversify?

There are several different reasons why investors are urged to diversify their portfolios. The main reason to diversify is to neutralize the risk of losing your financial pants. Evergreen Investments argues that diversifying investments and assets helps reduce the risk as it flattens out some of the fluctuations in the market. For example, the high risk of stocks is somewhat evened out when an investor also ties his money into cash or cash equivalents.

Ways to Diversify

Investors have several different routes they can take to diversify their portfolios. One way is to begin with the major asset classes. Investors can pick and choose from stocks, bonds, and cash to balance out the risks involved as well as the level of returns in these classes.

Then, there are the sub-classes. For example, one can base their asset allocation on the market sector such as technology or health care. This is also known as diversifying by industry sector. There is also investment style, which refers to how investments respond to change. Also, there are geographic markets that can define options for investors to branch out and alter the approach to their portfolio.

Beyond the Classes

The truth is diversification can take place within the classes. Ameritrade, for example, points out that one way to diversify one’s portfolio is through stock diversification. Basically, investors buy different types of stocks. Types of stocks include Income Stocks, Blue Chip Stocks, Growth Stocks, and Cyclical Stocks. You can also diversify between Low-Cap, Mid-Cap and Small-Cap Stocks. Each of these types of stock provides the investor with a certain amount of risk and expected return.

This same process can be used with different types of bonds and different types of cash equivalents. Again, the goal of the diversification process is to fight against putting all of one’s eggs in one basket. Diversifying provides investors with a sort of checks and balances system, giving them some assurance of a happy financial ending.