One of the popular ways of diversification in the modern world of integrated markets is international investing, i.e., diversifying across geographies. All said and done, managing overseas investments is the ultimate key.

Markets have become increasingly global and integrated, with variety of factors driving them. Investing in today's markets requires smart strategies and tremendous skills. Of all the factors which decide the performance, critical importance need to be given to portfolio diversification. In fact, we can say that diversification is the single most important element of investment planning. In simple terms, diversification means spreading one's investment across many stocks or even other asset classes. It is a portfolio strategy that reduces risk by combining different investments that have low or no correlation.

As we know, total risk of equity security contains both systematic and unsystematic components. The former arises due to market or macroeconomic factors. The latter arises out of stock or asset-specific events. While the former cannot be eliminated by diversification, the unsystematic risk can be eliminated by proper diversification. We get rewarded for the systematic component of risk in the portfolio and not for the unsystematic component. Hence, we have a need for diversification to eliminate the unsystematic risk. Thus, portfolio total risk declines as the number of securities in the portfolio increases. Studies have shown that having around 20 securities eliminates most of the unsystematic risk of a portfolio. Proper diversification can reduce many kinds of risk including company-specific risk, poor fund management risk, industry risk, etc.

The Analyst Magazine, Overseas Investments, Investment Planning, Portfolio Diversification, Systematic Components, Macroeconomic Factors, Equity Markets, Foreign Direct Investments, Exchange-Traded Fund, Foreign Debt Securities, Money Market Instruments, Mutual Funds.