Will a diversified portfolio make any difference when the stock market crashes?

During hard economic times it's difficult to tell what the stock market will do. But will a diversified portfolio make any difference when the stock market collapses? Diversification means dividing your investment among a variety of assets to help reduce the risk you take with investing. Investments will naturally rise and fall and work independently of each other, so it's really in your best interest to diversify your investment portfolio. Often times the combination of these assets will cancel out each other's fluctuation.

Investors can diversify their portfolio in several different ways. You can diversify across one type of asset classifications, like stocks. For example you might purchase shares in leading companies across several industries that are unrelated. You can also diversify across different types of assets or by regional decisions. Let's take a look at some pros and cons of having a diversified portfolio and why it often times does make a difference having a more diversified portfolio.

Pros of having a diversified portfolio

• Even if a few of your stocks are performing poorly, it will not significantly affect the overall portfolio performance. When you diversify your portfolio you reduce the risk you take because if one stock is doing poorly, another may be doing well. It creates balance.


• A diversified portfolio requires less active management with fewer buy and sell decisions and attendant lower costs.


• The performance is correlated with broad indexes and thus generally does well in an up market.


• The performance of your portfolio will be no worse than the broad market or index.

Cons of having a diversified portfolio

• Even with a diversified portfolio you could have one excellent performing stock, but it will not significantly improve the performance of your portfolio. This can also cause you to miss out on large potential gains.


• Performance is highly correlated to the broad market or sector and generally does poorly in a down market.


• Performance will not be better than the broad market or index.

So will a diversified portfolio make any difference if the stock market crashes? The answer is yes. The most important part about creating a diversified portfolio is to try and find good stocks that will most likely survive the stock market crash, and to invest your money in more than just stocks. It's always a good idea to have some of your investing money in the stock market, but it can also work towards your advantage to have some of your money in government bonds. While the bonds may not generate as much return as a high paying stock, they are the most likely to survive a market crash. They are fairly risk free as they are secured by the government and so you are pretty much guaranteed the money you put in, while stocks are a little less predictable. You want to diversify your portfolio so that just in case the stocks you invested in do lose all their value when the market crashes, you will still have some money left in your bonds.

You don't have to diversify your portfolio if you're certain that your stocks will be the ones that survive a market crash. It is however less risky if you diversify your portfolio and can potentially save you from losing all your money if the stock market does crash.