We have all heard the old adage – “don’t put all your eggs in one basket”- well, investing is no different.
By spreading invested funds across a number of different assets you can reduce the overall risk for your portfolio, as you’re not relying on only one or two assets as your investment.
It’s called ‘diversification,’ and while it doesn’t guarantee that you won’t make a loss if the general direction when markets are down, it can reduce the risks associated with investing.
The world changes every day with unpredictable political, social and economic factors that can move markets very quickly and not all markets react in the same way. It is best to spread your risk over multiple markets and assets so your whole portfolio does not get caught in any single negative event.
The aim is to hold assets that do not always move up and down together all the time.
On any day, some of your assets may win, some may lose, but overall the result should be that the portfolio rises in value in the long term.
But diversification isn’t just a protective measure; it may also allow you to generate a higher rate of return for a given level of risk.
There are several different kinds of diversification. There is diversification across asset classes – cash, fixed interest, shares and property held throughout different States as well as types of property held.
Finally there is diversification within an asset class – as in having a diversified share portfolio of different companies and industries.
Studies have shown how you diversify your portfolio – or your asset allocation – can be one of the most important investment decisions you make.
Diversification is not simple, so we recommend you seek financial advice before making any decisions about your investments, to ensure your choices are appropriate to your personal objectives, financial situation and needs.