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Understanding the meaning of diversification in the world of investments is crucial to being successful in the financial market, and this principle is the secret to the success of great investors.
Diversification serves to reduce the risk of exposure to the fluctuation of a single asset or sector, which is what the famous phrase "don't put all your eggs in one basket" comes from.
The secret is to diversify your capital across several assets from different sectors of the economy that have a high degree of liquidity, with good fundamental indicators and solid companies on the market. A small portion, between 10% and 30%, you can allocate to assets with growth potential based on your listing price.
I bring two examples below:
You use all your margin (100%) by trading long on an asset that is trending downward with the expectation that you will profit from its rise.
But the price starts to fall due to lack of liquidity, you are in a long position and you are having a loss.
In this second scenario you divide the margin into 50% on the first asset and 50% on the second.
What happens is that you don't take a loss, because you opted for a more rational choice when diversifying. While the first is falling, the second is rising, compensating the first loss.
If you are a conservative investor, you will choose to invest in a diversified way and minimize the risk of losing money.
If you are a beginner in the market, the best option is to start building an emergency reserve with fixed income assets, which pay a fixed return and do not suffer from market price volatility.
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