Portfolio Risk: Diversification is not the only way

In a properly diversified portfolio it is important to not only diversify within an asset class but ensure you have assets that work ‘out of tune’ with one another. If you were to have all of your investments performing well at the same time beware as when there is down in the market they’ll all most likely head the same way.

Simplistically let’s look at it this way: you have two investments a winter one and a summer one. They both perform well in season but not so well off-season – they could be positive 10% and negative 10%. By placing the two together you then get the average return of the two.

Why Diversify?

“Don’t put all of your eggs in one basket!” You’ve no doubt heard this said many times throughout your life…and when it comes to investing, it is even more important. Diversification is the key to successful investing.

The key is to invest in several different areas and not just one. That means different industries within equities, different companies for your fixed interest and bonds, as well as a mix of properties. It also means including international investments.

Having all your money in one investment alone is dangerous. If that lone investment takes a significant plunge or worse still is in receivership, you will most likely find that you have lost most or all of your money. On the other hand, if you have invested in ten different shares, and nine are doing well while one plunges, you are still in reasonably good shape.

By diversifying your investments, you will find that you have a lower risk of losing your money, and over time, you should see better returns.