NEW YORK (MainStreet)It is very important for young investors as well as a new investors to diversify their portfolios. The reason for diversification is to protect the you: in the event that one specific sector in the stock market fails, or is at a low, other investments in other sectors may bring you back. Profitable opportunities can be missed and disasters can arise if not done properly. But if done correctly, diversification can be a life saver.
In the stock market sectors range from basic materials and consumer goods to health care, industrial goods and technology. Data will be released 24/7 about these sectors and the stocks within them. Each sector has different news, either good or bad, that could sway your portfolio dramatically.
Let's say that you have not diversified your portfolio correctly, and you have only stocks within the Pharmaceutical sector. You eventually buy Pfizer Inc. (PFE), Johnson & Johnson (JNJ) and Novartis (NVS), which are very recognizable companies in medical and drug sector services. You have low liquidity within your portfolio and are depending on these specific stocks. Let's say the International Foundations of Medicine (IFOM) releases a statement that a generic ingredient, used in most drugs, has been labeled unsafe. All of the sudden, most of the stocks within this sector have dropped dramatically including the three that you have purchased. Not knowing how long the dip could be for, your funding could be trapped in those stocks for months until you have fully recovered.