Investment Chance And Diversification

by David Jenyns on August 20, 2008

Chance is inherent in the environment (social, political, economic and natural) in which we live. Using funds to produce income or increase their monetary value also entails chance. The investment company has an economic reason for existence largely because it tends to reduce chance for the investor. Rapid change means greater chance.

Good investment management should lessen chance, however, and sound investment management is one of the two reasons for investment companies. How can investment companies reduce chance and increase return? Most managements rely upon diversification and timing as their principal instruments.

To spread chance by diversification is the very essence of investment company theory and operation. As applied to investment company practice, diversification is an effort to distribute chance somewhat in accordance with insurance principles.

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