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Get Started in Shares by Glen Arnold

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Diversification – the nearest thing to a free lunch in investing

We have all heard the adage ‘don’t put all your eggs in one basket’. This applies to your portfolio as much as to other aspects of life. If you place all your money in one company you are vulnerable to adverse news (e.g. a product failure, chief executive’s resignation, government rule change) causing a plummet in price. Holding one company’s shares in your portfolio will typically result in volatility.

If you split your fund between two companies, at any one time there is a fair chance that bad news affecting one is offset by good news affecting the other, so that overall portfolio returns do not oscillate as much. This principle works even better if you have three, four or five ...

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