diversify portfolio

[investor]

When investing your money why do you have to diversify your portfolio? Do you have to invest in different industries or just in different companies in the same industry?

[Canadian]

You don't have to diversify, but is a smart thing to do for most investors. The idea is not to put all your money in a single company/industry/investment vehicle. Investing all your hard-earned money in a single company is risky, because if this company tanks then you will lose a lot of money. The same is valid if you bet all your money on a single industry - if this industry starts to struggle, then you lose again. The same is valid if you put all your money in single asset class, stocks for example. With the ongoing credit crunch most paper assets like stocks are not fairing very well.

[invest]

At the moment you are lucky if you still have any money left for investment. I think right now everybody is afraid to buy stocks and to invest in anything. On the other hand the stocks are so cheap now it is time to buy but we are all afraid aren't we?

[Canadian]

Originally Posted by invest

At the moment you are lucky if you still have any money left for investment. I think right now everybody is afraid to buy stocks and to invest in anything. On the other hand the stocks are so cheap now it is time to buy but we are all afraid aren't we?

The stock might look cheap, but this is assuming the companies will have the same earnings next year, which most likely won't be the case. If a stock price is slashed in half, but at the same time earnings go down by 50%, the stock doesn't become more attractive or better priced.