Investing and investment strategies have been the most talked about topics for the past years. However, one particular approach should rank on the top of everyone’s investment planning is DIVERSIFICATION.
The benefits of diversification
- Spread the risk. Diversifying investments across all asset classes, allows you to benefit from each years best performing asset class. The concept can be summarized in one sentence “do not put all your eggs in one basket.”
- Smooth your returns. Investment markets tend to operate in cycles. Broader exposure will enable strong returns from one asset class to offset performance of another.
- Avoid timing errors. Chasing returns is notoriously difficult. Maintaining a mix of asset types in your portfolio helps ensure you benefit from each years best performing asset class.
Ways you can diversify
A diversified portfolio can take many forms but generally speaking there are three main types of diversification:
- Across asset sectors. This involves keeping a range of asset sectors in your portfolio, thereby reducing your dependence on the performance of any particular sector or economy.
- Within asset sectors. Taking Australian shares as an example, you can diversify across a number of industry sectors and individual companies to further spread the risk in your portfolio.
- Through investment management styles. Investment managers all have their own way of choosing investments, each of which will perform differently at different times. Having a number of managers in your portfolio means you’re less reliant on any single manager’s performance.
Any type of investing is somewhat of a gamble. Unless you are doing strict savings in a savings account. Depending on your situation, you’ll need to distribute money among the different asset classes differently to suit your risk profile; even so, diversification is still important so that your investments as a whole are less at risk than they would be if they were not so diversified.
Having a diversified investment portfolio is just smart money managing, but what exactly does it mean and how do you do it the right way? To discover how a more diversified portfolio that specifically matches your risk profile can help you achieve your financial goals, please contact us.