Creating A Diversified Investment Portfolio

Essay by PaperNerd ContributorUniversity, Master's October 2001

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Creating A Diversified Investment Portfolio The first step involved in the creation of a diversified investment portfolio is to develop an understanding of the purpose of this goal. A personal investment portfolio is simply the collection of an individual's investment holdings. Diversification, as applied to investments, refers to the establishment of variety in a portfolio or the spreading one's investment dollars around. It is important to realize that to diversify does not mean to invest randomly. Quite the opposite is true. Diversification requires the development and the implementation of a plan with the correct balance of security and risk, in order to accomplish the growth and/or income one desires. The purpose of diversifying an investment portfolio is to prevent the concentration of all of an investor's money in one place. Thus, financial security will rely on the strength of the portfolio as a whole, not on the productivity (or lack thereof) any single investment.

Determining the risk levels of various investments is essential to the development of a diverse portfolio. Many experts recommend the establishment of a strong cash base before entering into an investment plan. An amount equal to three to six months living expenses is generally recommended. After establishing a cash base, most people develop either a conservative, moderate or speculative strategy for their investment portfolio. A conservative approach involves concentrating on limited-risk investments. A moderate stance is taken to develop growth, which involves more risk. Speculative approaches require major risks and offer the potential for higher earnings or losses. It is important to realize that there are no zero-risk investments. Even Certificates of Deposit and savings accounts, which offer a high degree of safety and liquidity, involve risks. One such risk is that the rate of inflation will rise faster or greater than the rate of return,



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