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What is Diversification?

What is diversificationWhat is Diversification? This is the first of a series of posts where I discuss the question of diversification in business, investments and income streams.

Having had a background as a financial planner I am very familiar with the word “diversification” in investment terms.

Let’s look at some definitions of Diversification.

From Wikipedia, What is Diversification?

In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of its constituents. Therefore, any risk-averse investor will diversify to at least some extent, with more risk-averse investors diversifying more completely than less risk-averse investors.

Also from Wikipediawhat is diversification?
Diversification is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit level or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry that the business is already in.

In this series I discuss diversification in a broader sense than the two Wikipedia definitions which cater for investors and for corporate.  I believe everyone should have more than one way they earn income. This applies to business, home based business owners, investors and employees. Why do I believe this?….. Because I have been burned twice by not being diversified and I learnt the lesson (pity I did not learn the first time). I will share those stories with you in later posts in this series.

For now let’s go back to the question ….. What is Diversification? What does it mean for investors, business and employees?

What is Diversification – Investors – the Wikipedia definition is simple enough to follow. We have all heard the sayings “Don’t put all of your eggs in one basket”, “spread you risk”.

I have heard people put forward the argument against diversification saying that you can only really understand one asset class well. For example if I love Residential Property and know how to be an astute investor in that area then I am better to stick with that rather than also have investments in stocks and shares.

The downside is if you pick any one type of investment in isolation there will be downturns. Diversifying can smooth out the overall ups and downs.

What is Diversification – Corporate/Business – again the Wikipedia definition is a good one. I will discuss my own experience and what not diversifying cost me in this series. A business that does not diversify is at risk. Products and trends change now at an ever increasing speed. We have seen many businesses who have not kept up with change become obsolete.

What is Diversification – Home Based Business – multiple streams of income protects the home based business owner in exactly the same way as having a conventional business.

What is Diversification  – Employees – The days of job security are far behind us. We have witnessed this in a very large way through the Global Financial Crisis (GFC). It is also very difficult to create wealth and a secure future with just a job. It is important to build up other sources of income. This could be investments or a home based business.

One of the best alternatives for employees is to start a home based business part time. The income from this could then be used to invest in property, stocks or other assets. Many people with significant incomes from home based businesses started the business while they were an employee. I think this is a great strategy.

In Summary What is Diversification?  – Diversification reduces our risk and also provides us with multiple options for our financial security.

In part two of this series on What is Diversification I will share with you my personal story of being a sole distributor and the lessons I learned. I tell these stories as I hope others can learn from my experiences.

Please leave me your comments below. I love to hear what you think. Please  also share this post on What is Diversification with your Twitter and FB friends by clicking on the share buttons. I appreciate you telling others.

31 thoughts on “What is Diversification?

  1. Chris McCargar

    In the world we live in today, I think you’d be foolish NOT to diversify. You showed us the definitions, but I wonder how many “average Joes/Janes” really consider the need? Or are they stuck wondering “how” to do it?

    I think it has really become a necessity for everyone to find multiple sources of income as well as diversifying not only their efforts, but their assets, too!

    1. Sue Post author

      Chris I think most people who are employees do not think about diversifying their income (except maybe with a second JOB).
      For many business people they do not understand it and I think you are probably correct in thinking they do not know how to.

      Diversification is critical and a message that needs to be spread.

      Thanks for your comment.

      Sue

  2. Louise Steiner

    Sue, I am looking forward to the rest of this series, although I am sorry to hear that you had to learn the hard way.

    As an ex-portfolio manager I am fully conversant with the idea of diversifying the risk of my investments, but in the many years that I was an employee, I never considered the need to diversify my personal income streams. As you say, the days of a job for life are gone and I now fully appreciate the need to diversify not only my investments, but also my income streams. But we can take it one step further….

    A recent example that springs to mind for online entrepreneurs is the ‘Google slap’. A number of businesses were entirely dependent upon google ads for their traffic and therefore their income streams and when their accounts were closed down over night, their traffic and income ground to a halt. I think this demonstrates that we need to consider diversification at every level of our business.

    Thanks for this great post Sue.
    Louise

    1. Sue Post author

      Louise I do not think many of us that started out as employees thought of diversifying our incomes.

      I love your additional point on the Google slap. Relying on one way of marketing clearly is not a good strategy so clearly we should be looking at every part of our business. I think too many people find something that works and then just stick with that. Diversification is key.

      Thanks for your great comment Louise

      Sue

  3. George

    Hi Sue, I understand what you meant about employees needing other source of income in case crisis would occur in the economy. Owning a business can be risky, but diversification works by dividing the risk, which has better chance of success. It is essential that we think ahead and look for other ways on acquiring income. I can’t wait to read the second part. Thank you for sharing.

    1. Sue Post author

      Thanks for finding me George and for your comment.

      If you read my next one which is up there now (and listen to my video) you will see I learned this lesson the hard way. I hope by sharing my experiences others can learn from me.

      Sue

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  5. Richard

    I think another benefit of diversification is simply that jobs can be repetitive and dull, so the more things you do in order to earn a living, the more interesting it can be. Jobs seem to be getting more and more specified to single rolls, which can soon get very dull.
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    1. Sue Post author

      Hi Richard
      Thanks for finding me here and for commenting.

      You have raised another very good point on this subject in that jobs can be repetitive and dull. I know many people who do not enjoy their job and that is sad given how much time we spend at work.

      Have a good day.

      Sue

  6. Pingback: What is Diversification? – Part 3

  7. Pingback: What is Diversification? – Part 4

  8. careninagirl

    I have once heard about diversification from my father. Putting my income to other investment. So i may have a fall back in case the other one get slow or for other reason, diversification can double up an income. You really are an entrepreneur not just a plain blogger. Please keep on posting articles like this. I am really interested.
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    1. Sue Post author

      Thanks for your comment careninagirl. You seem to have a sound understanding of diversification.

      Take care

      Sue

  9. Adam Robinson

    Sue,

    I’m beginning to like your blog and I’m not kidding. The striking part in your post is “everyone should have more than one way they earn income”. It almost moves me on my seat as I think I am already secure of my current source of income. I’ve been through ups and downs really but “what if one day?” I’m gonna check out the next series. Thanks so much Sue.

    1. Sue Post author

      Adam I think diversifying your income is very important. We live in times of such rapid change. I think most of us go through ups and downs. We can learn from the downs and that is important.

      Sue

  10. David

    Great manifestation and insights about diversification. I never heard this word before and I’ll just know it from you and I do understand all of it. When we say diversification it is all about investment, in network marketing business diversification is most probably applied. I’ll just make a point about it and I learn a lot of things here. Thanks much!
    David recently posted..Repo Cars For Sale in FloridaMy Profile

    1. Sue Post author

      David thanks for your comment. Diversification is a great thing to learn about. I am particularly interested in people having multiple income streams.

      Sue

  11. Mark Spencer

    I love that word “diversification”, it sounds new to me. Yeah, it’s true you have to diversify or invest in different assets and later on it contributes good right? Lots of sense I found here and my great pleasure to read your post Sue, I truly learn.
    Mark Spencer recently posted..Woodworking ArticlesMy Profile

    1. Sue Post author

      Mark thanks for your comment. I first learned about diversification in my days in financial planning. The concept was not to have “all of your eggs in one basket” and to spread your risk. I have since expanded the concept to include the way we earn our income.

      Sue

  12. Villa

    Portfolio diversification is an important concept for investors to understand. Proper diversification will help even out market volatility.

  13. Edward

    It’s important to remember that no matter how diversified your portfolio is, your risk can never be eliminated. You can reduce risk associated with individual stocks, but there are inherent market risks that affect nearly every stock. No amount of diversification can prevent that.

    1. Sue Post author

      I agree with you Edward you can never eliminate all risk. You can however reduce the potential impact.

      Thank for commenting.

      Sue

  14. Lina

    It’s also important that you diversify among different asset classes. Different assets, such as bonds and stocks, will not react in the same way to adverse events. A combination of asset classes will reduce your portfolio’s sensitivity to market swings.

    1. Sue Post author

      Thanks for your comment Lina. I agree with your point on having a combination of asset classes. My series here is really more about diversifying income streams.

      Thanks

      Sue