Why is it not advisable to rely on a single investment?

Why is it not advisable to rely on a single investment?

• A. It guarantees success
• B. It increases the risk of major losses
• C. It simplifies the investment process
• D. It is easier to manage

Answer: (B)

Relying on a single investment is not advisable primarily because it increases the risk of major losses. When an investor places all their funds into one asset or investment vehicle, they expose themselves to the full impact of any negative performance that asset may experience. If that investment doesn't perform well—due to market fluctuations, company-specific issues, or other unforeseen events—the investor could face substantial financial loss. On the other hand, diversifying investments across multiple assets spreads the risk. This way, if one investment underperforms, others may offset those losses, leading to a more stable overall portfolio. This principle of diversification is a crucial strategy in managing investment risk effectively. It helps in achieving a more balanced risk-return profile.

Relying on a single investment is not advisable primarily because it increases the risk of major losses. When an investor places all their funds into one asset or investment vehicle, they expose themselves to the full impact of any negative performance that asset may experience. If that investment doesn't perform well—due to market fluctuations, company-specific issues, or other unforeseen events—the investor could face substantial financial loss.

On the other hand, diversifying investments across multiple assets spreads the risk. This way, if one investment underperforms, others may offset those losses, leading to a more stable overall portfolio. This principle of diversification is a crucial strategy in managing investment risk effectively. It helps in achieving a more balanced risk-return profile.