Diversification: What is it and Why Should You Care?

Joshua Bowman 

I concur that one cannot achieve diversification through holding companies in the same industry. To achieve diversification, an investor has to hold shares under different companies that do not fall under the same industry. Investing in the same industry places the investor under a low risk because the companies are affected by same economic factors. Though they are different, the financial institutions will be affected by changes in the market the same way. To avoid such risks and achieve a diversified portfolio, one has to invest in companies that fall under different industries because they react differently to the market. Having a diversified portfolio is beneficial because if one rises, there are chances that the rest will follow the same trend. Based on the stock developments of the Bank of America, Citi, Wells Fargo and Chase Bank, it is evident that all the institutions reacted similarly to the fluctuation except for Wells Fargo. 

Dion Blake 

At its core diversification refers to the lack of common characteristics or relation. To achieve diversification as an investor, the financial backing of the industries involve should vary with one another. I concur with your personal experience that having different investments in the same industry does not necessarily mean that one has achieved a diversified portfolio. This is because of the risk of exposure. Regardless of how low or high the risk is, even the most lowly risk product will feel the same impact as those in the same company. Diversity can only be achieved if companies invest in various companies that deal with renewable energy, mutual funds, high yielding acts and even crowd funding. Such diversification should be combine with risk that has been well calculated in order for it to pay off to the investor. Looking at the three banks, financial gains have been relatively the same because they react to the market similarly due to the fact that they are in the same industry.