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Here is the anser to this Frequently Asked Question.

Why should I diversify my investments?

One of the major benefit of portfolio diversification is the potential to increase returns in the long term through minimizing risk and reducing the negative effects of market volatility on your portfolio. Investing globally and spreading risk across a variety of investments are solid diversification strategies.

A globally diversified portfolio can help reduce risk
Global investing is an important and widely recommended part of an investment strategy that seeks to build an optimal portfolio – one that achieves the best possible balance between risk and return. Those investors who believe that investing abroad is more risky than investing in domestic equities may be surprised to learn that, in fact, overall portfolio risk may be reduced by adding foreign equities to the mix. Global investing can increase the potential for higher returns.

History has shown that global investments can outperform their domestic counterparts. So, by allocating all your investments to domestic markets, you could be substantially reducing your investment portfolio’s performance potential.

Spread risk across several types of investments
Another way to potentially maximize the value of your portfolio over the long term is to allocate money among various types of investments, such as stocks, bonds, money market instruments or mutual funds.

Avoid hindsight investing
The clever investors will tell you that investing is a gradual process and that without a consistent strategy, you are essentially gambling on the stock market. Some investors put most of their money in technology stocks, some of which ran up eye-popping returns in 1999 and in early 2000. The meltdown of the technology sector is an illustration of the dangers of hindsight investing, or putting your money on yesterday’s “hot” investments.
Meanwhile, investors who allocate their investment dollars among a diversified group of assets (both geographically and by asset class) and let them perform over time seem rare these days.

Market volatility is becoming more widespread
For many investors, buying and selling in an attempt to pick the highs and avoid the lows poses a great temptation, and volatile markets subsequently can take their toll on their portfolios. In the year 2000, the NASDAQ Composite Index swung more than three per cent on 72 occasions.** In 1998 and 1999 combined, there was a total of 35 days when this index shifted by three per cent or more.

A diversified portfolio can bring peace of mind
Indeed, investing globally, and spreading risk across a variety of investments and avoiding chasing yesterday’s “hot” investments are essential to building a portfolio that can help you realize your long-term financial goals. You’ll move closer to your goal and benefit from the peace of mind that comes from owning a diversified portfolio.

Provided by AIM Trimark Investment

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