Froma critical observer’s perspective, one may conclude that allinvestments are risky. As a result, this justifies the FederalDeposit Insurance Corporation’s (FDIC) disclaimer on investmentsthat, “Not FDIC insured. No Bank Guarantee. May Lose Value”, tagis relevant. According to Dziwok (2014), entrepreneurs can overcomethe investment risk through diversification of their portfolio. Theauthor recommends that investors should also understand the operationof various investment classes. Nevertheless, I dispute the strategyof diversifying investments as a means of reducing financial risks.
Kobayashi-Solomon(2015), the author ofThe Intelligent Option Investor: Applying Value Investing to theWorld of Option,argues that understanding the investment trends is a better optioncompared to diversification. In that case, he advises thatentrepreneurs can work with a few investment instruments that theyunderstand. Strategic investing involves understanding the best timeto enter into a deal as well as the most appropriate time to exit.For instance, investors should buy stocks when they are selling atlow price and them once they appreciate. Investment managersunderstand the various factors that determine the price ofinvestments. Similarly, entrepreneurs should seek their assistancebefore they diversify their investments as they might put their moneyin several investment instruments that will be on a losing streak inthe future.
Martos-Vila,Rhodes-Kropf, and Harford (2014) adds that entrepreneurs should focustheir synergy on searching for undervalued property, stocks or anyother investment instrument to increase their resale gain. Similarly,the authors also propose choosing a low-risk investment option thathas lower chances of losing the set capital. However, the sourceagrees that diversification can be a suitable alternative forlowering the risk when the entrepreneurs do the due diligence toensure that they are putting money on a stake that will gain highervalue in the future.
Dziwok,E. (2014). Asset allocation strategy in investment portfolioconstruction – A comparative analysis. Journalof Economics and Management, 18,123-132.
Kobayashi-Solomon,E. (2015, Sep 1). Five steps to reducing investment risk. ForbesMagazine. Retrieved on Dec. 21 2013 fromhttp://www.forbes.com/sites/erikkobayashisolomon/2015/09/01/five-steps-to-reducing-investment-risk/
Martos-Vila,M., Rhodes-Kropf, M. & Harford, J. (2014). Financial vs.strategic buyers. HarvardBusiness School.