Long-Term Financial Options Term Paper Example | Topics and Well Written Essays - 4500 words

Long- Financial Options - Term Paper Example A safe investment is one, which offers reasonable protection against the risk of capital loss. Success in minimizing investment risks really depends on you, your temperament, and the approach you decide to adopt towards investment matters. Two other ways to minimize investment risks and ensure greater safety are diversification and liquidity. The principle of diversification is best stated in the oft-quoted maxim: never put all your eggs in one basket. Spread your money over a number of widely different assets; buy real state, shares, debentures, government securities, silver paintings or whatever else you consider to be an attractive investment. Diversify geographical in-law does to concentrate all your investments in one city, state or region of the country. On the stock market, diversification can be achieved by buying shares in a number of companies, manufacturing different products, operating in different lines of business, belonging to different business houses and catering to different markets. Diversification has the additional advantage of protecting you against your own prejudices and errors of judgemen1It also enables you to hedge your bets, reduce your potential losses, and provides you with an-built insurance against unforeseen dangers and pitfalls. However, despite many points in its favor, diversification does not provide a satisfactory answer to many investment problems. In the final analysis, diversification is nothing more than average investing. It helps you to get average, or close to average, returns-nothing more, nothing less. Diversification is of little use to you, if you aim to beat market averages and get high returns. For that, you will have to deploy your investments in potentially high-return assets and investment media. Moreover, excessive diversification greatly enhances the problem of investment management and control. The more diversified your investments, the greater will be the problems you face in exercising effective managerial control over them. Therefore, as in risk versus return, the successful investor has to balance the advantages and disadvantages of diversification as against concentration.