Diversifying your investments – what does it mean and why does it matter?
You've probably heard the phrase 'don't put all your eggs in one basket'.
And while it might be a bit clichéd, it's still sound advice when it comes to your investments.
In industry speak, we call this diversification.
What is diversification?
If you're employed and haven't done so already, it could be worth joining your company's pension scheme. Diversification
means spreading your investments across a variety of different assets – whether that's shares, property, cash, equities or any other. The purpose of doing this is to reduce the volatility of investing and manage the level of risk being taken.
How? Well, not all assets are affected in the same way by the same events. Property prices, for instance, could be impacted differently to, say, the value of gold during times of financial disruption. Likewise, if you choose to invest in equities, you could opt for companies that are in different sectors, in different geographical locations or that are different sizes.
Having what we call 'negatively correlated investments' within your portfolio can also hedge the risks. Think of it like this: if you were the owner of an ice-cream van, you may also benefit from selling scarves or umbrellas on the not so sunny days.
Mitigating your risks
By using this sort of strategy you're mitigating the risk involved. So if one part of your portfolio isn't doing well, the investments you've made in other areas should compensate for those losses.
Finally, as important as it is to diversify, it's equally essential not to over-diversify. Having a range of investments can only reduce your risk up to a point, and holding too many means the return they could offer in the long run won't have as significant an impact.
What is key is finding a level of risk and return you feel comfortable with – and that suits your current stage of life.
If you would like advice on diversifying your investments and how to manage your portfolio, contact us on 01978 806505 or firstname.lastname@example.org to arrange a free 60-minute consultation. Alternatively, you can fill in our contact form and we will get in touch with you.
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