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Stock Investment Diversification

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Why is Diversification Important?

We are all familiar with the age-old adage, "don't put all of your eggs in one basket." Why? Because if that basket drops you lose all your eggs - a sorry state of affairs if you are relying on those eggs to see you through a week's worth of meals.

Most financial planners advise their clients to diversify their investment holdings. By blending your investments you increase your odds of weathering a nasty downturn without wiping out your nest egg. Of course, there is a downside to diversification. That is, when times are good, as they have been for the past decade or so, a diversified portfolio will limit your upside return. In essence, you will not fully participate in a raging bull market because you are not fully invested in stocks when stocks are rocketing higher with each passing day.

Holding cash, bonds or other conservative investments will definitely reduce returns when the stock market is hot. Overall, however, most investors are willing to sacrifice some of the upside in order to sleep well during times of downturn or uncertainty.

Should I Invest in Technology Stocks?

Most financial planners recommend a diversified portfolio of stock investments. A stock portfolio dominated by technology stocks will tend to be much more volatile - and risky, than a more balanced portfolio. Stock volatility means that returns tend to be less predictable than those of more conservative investments. Returns will be high during good times and losses will be accentuated during bad times. Stock volatility has a disruptive effect on compounding and exposes an investor to significant risk..

It is generally true that growth stocks (which typically include technology stocks) hold up better in a recession than their cyclical counterparts. However, when tech stocks stage a massive retreat, as they have done on more than one occasion, the downside can be devestating for an undiversified investor.

Risks notwithstanding, technology stocks are likely to continue to play an important role in improving the productivity of the economy. As such, many technology stocks will far outperform the market averages. The challenge comes in picking the right stocks. Alas, until a more reliable crystal ball is developed, most investors will pick their share of winners and losers. So, while there is definitely a place in most investment portfolios for technology stocks it is wise to stay diversified.

Stock Market Definitions

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