Question

why is it important for people who owns stocks and  bonds to diversify their holdings ?explain

Answer 1

Investment in bonds and stocks is a risky preposition.

Change in economic health of country or any other event across the world can significantly alter the prices of stocks and bonds being held by an investor.

Such alteration in price can lead to windfall gains or can lead to evaporation of entire invested money.

However, each stock or bond being purchased by the investor does not have same risk associated with it.

Different stocks or bonds have different risk profile.

Some stocks are considered more risky than others. Same is true with respect to bonds as well.

This different risk profile of different stocks and bonds call for diversification.

Diversification implies that a investor should invest in stocks and bonds of different risk profile. So that, high risk associated with one asset class can be balanced with low risk associated with other asset class.

This way investor can earn decent returns in a balanced and secure manner.

Therefore, it is important for people who owns stocks and bonds to diversify their holdings.