Question

Question 3 －－－－－finance corporate

The investment advisors always said “Don’t put all your eggs in one basket”. Do you agree? Discuss your viewpoints within 500 words. Use examples to illustrate your arguments and justify your conclusion.

Answer 1

I agree with statement, We should not put all eggs in one basket. we have to do diversification investment.

Diversification:

(1): the process of making diverse; giving variety to

(2): to divide funds with the expectation that the positive performance of some will offset negative performance of others (as in investing).

The goal of diversification is to reduce risk. The logic is quite simple. If you invest in things that do not move in the same direction, at the same time or at the same pace, then you will reduce your chances of losing all of your money at the same time or at the same pace. For example, in 2008 the S&P 500 had a negative return of 37.00%, which, on a $100k investment would have resulted in an ending value of $63k. Alternatively, if you had allocated just half of your funds to the Barclay’s Aggregate Bond Index, again for example, your ending value at the end of 2008 would have been approximately $84,120.

Diversification is more than holding different types of investments like stocks and bonds. It is also important to diversify within your stocks and bonds. Within your stock piece, it is important to allocate to companies within different sectors of the market (i.e., technology and healthcare). It is also important to diversify among size of companies in terms of their representation in the overall market. This is referred to as market capitalization ([# of shares in the market x stock price] = market capitalization).   Within your bond piece, it is important to diversify among different types of bonds (i.e., government bonds, corporate bonds and high yield bonds). Different types of bonds respond differently to a change in interest rates so spreading funds among various types can help reduce interest rate risk as well as default risk (risk that the corporation, for example, goes out of business and cannot pay interest or return principal).

As you might suspect, diversification can be challenging because it requires an investor to make an informed investment decision on a number of investments. Those that do not believe they have the time, knowledge or desire to do the research required of diversification may elect to diversify by using mutual funds or ETFs. Through these vehicles, investors can delegate the research and selection process to the fund manager who pools your funds with other shareholders to buy a large number of investments.