Diversification In Investing - Why It’s So Important
- On the Money Magazine
- Jul 28
- 2 min read
Oliver Krzeczowski, Junior, Walter Payton College Prep, Fall 2024
Investing is a key factor in maintaining financial security and stability, yet investing continues to scare Americans. With limited investing knowledge, headlines can become more alarming, and the market can look more uncertain than it is. Studies show that “more than half of Americans don’t invest outside of their retirement accounts” (Miczulski, 2023). Building well-researched and diversified portfolios is a key skill that can give people the tools they need to confidently secure their money for the future.
The market in general has maintained an average upward trend for much of its existence. The S&P 500 is a great example of this growth, on average gaining 10.5% since its inception in 1957. If the market is in a general uptrend, why are so many Americans afraid to invest? This fear stems from the risk associated with individual stocks, which are, by themselves, a potentially risky product. There is a difference in risk when investing the same amount of money in one company as ten companies. Investing in multiple companies spreads risk across multiple institutions and potentially multiple sectors. Researching the number of stocks necessary for this kind of individual diversification, though, can be very time-consuming, excluding most potential investors. Looking into ETFs and mutual funds can be a way to work past this, though. Portfolio manager Andrew Cupps argues that ¨reducing risk increases confidence and it can be as easy as buying mutual funds that replicate the market as a whole.¨ This important tool should be considered by all investors, especially the 42% that don't actively monitor the diversification of their investments (Leonhardt, 2019). It's one of the first and most effective ways that diversification can be observed, and a great starting point for new investors. Declan Parker, a young investor, says that a driving factor of his investment strategy is managing risk, something he does by incorporating ETFs as well as a diverse selection of individual stocks.
In any case or financial situation, people can look to diversification as a way to mitigate risk and feel more confident about their investments. However, it’s important to remember that investing always carries risk.
List Sources:
Andrew Kupps
Declan Parker
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