The Ansoff Matrix Diversification. In a diversification plan, the company introduces a new product into a new market. Although this method is the riskiest. Since it necessitates both market and product development. But the risk can be minimized to some extent by diversification.
Additionally, the diversification approach may have the greatest potential for increasing revenues since it opens up an altogether new income stream for the organization. It allows the company to access consumer spending money in a market where it previously had no access.
What Is Diversification?
Diversification is an investment strategy. In which an investor buys stocks of companies in a number of different industries, rather than just one industry. Therefore, the investor is less likely to lose money if the industry his or her investments are based in experiences a downturn.
Ways to describe diversification
While diversification can help reduce risk, it also increases the complexity and cost of investing. A portfolio of multiple stocks can be much more difficult to monitor than a single stock. And at the same time that you’re trying to beat the market, you’re also trying to minimize your costs which may include trading fees, trading commissions and taxes.
Diversification also does not protect against loss due to events that affect the entire market (like what happened on 9/11). When making purchases for your portfolio, it is important to consider your unique financial situation and goals. For example, if you have a long time horizon before retirement and a high tolerance for risk. You might be willing to diversify into a broad range of investments. On the other hand, if you need income from your investments today and have a low tolerance for risk, you may be better off investing primarily in bonds or CDs.
Types of Diversification
Asset Class Diversification
The foundation of any diversification effort is asset class diversification. This involves buying different types of assets such as stocks, bonds and real estate. The basic idea behind asset class diversification is that all markets do not move in tandem with one another. Therefore, by owning assets that are not highly correlated with each other, an investor can lower his or her overall risk exposure.
Diversifying among countries allows investors to spread their investment across regions. That have different GDP growth rates, interest rates, inflation rates and currency values. For example, suppose you had decided to invest all your assets in Japan because you thought its economy was going to boom over the next few years.
Unfortunately, this did not happen—in fact, Japan’s national debt grew larger and its economy continued to struggle so much that it had to sell off large pieces of its infrastructure (e.g., airports) in order to pay down some of its debt burden (a process called privatization). By spreading your money across countries (or continents), you could have minimized your losses during this economic downturn since some of your money would have been invested in countries with better economic outlooks.
Additionally, diversifying among countries can help you take advantage of global economic trends. For example, suppose you had invested all of your assets in the United States before China joined the World Trade Organization (WTO) in 2001. If you had decided to diversify and invest some of your money into Chinese stocks, you would have been able to capitalize on this once-in-a-lifetime opportunity.
Additionally, while many investors were concerned about investing outside their home country, these investors made a lot of money by purchasing stocks that were not correlated with the U.S. market’s performance. In other words, by diversifying their portfolios, these investors were able to increase their return while simultaneously decreasing their risk.