Risks And Diversification

When you have $100K and decide to save it. Do you need to diversify the $100K and put e.g $25K per Fixed Deposit into 4 different banks? Let me know you if knew someone did that.

You don't diversify fixed deposits. Why? Because they are virtually risk free!

You diversify to mitigate risks. When there is no or very low risk, there is no need to diversify. So, understanding what are your risks is the key to how you should diversify to mitigate your risks. It can be very personal, and what works for others may not be suitable for you.

The Investment Risk Pyramid

First, you have to clearly understand the Investment Risk Pyramid

Risk-Reward Concept

This is a general concept related to risk and reward. When you take risk, you expect reward. In theory the higher the risk, the more you should receive for holding the investment, and the lower the risk, the less you should receive. But, some time in the financial world, it may not be actually true, investors were told that Lehman Brothers Minibonds are low risk but ended up with huge losses instead of returns.

So depending on your risk tolerance and see how you should adopt your investment strategy in the Risk Arrow from conservative to very aggressive.

 
It is only after you understand what are your risks, then you can determine your diversification strategies.
 
I know what are my money risks. I use 4 different bank accounts (baskets) to mentally and physically separate them to diversify and mitigate those risks. Each bank account serves its own purpose to meet a specific money objective and its risk profile.

http://createwealth8888.blogspot.com/2009/10/two-bank-accounts-no-you-may-need-four.html

So do I sound silly and look stupid?