Diversification

You probably know the risks associated with "putting all your ducks in one basket." Diversification is an important consideration for most investors.

What exactly is diversification?

Diversifying an investment portfolio means investing money in different investments. Diversifying your investment portfolio could mean diversifying across different markets, countries, and asset types, including cash, shares, money managers, or products.

Investment markets don't move in tandem

Diversifying your investments has many benefits. Investment markets are subject to cycles. They move in cycles, moving toward high points, then falling to low points, and returning to high points.

Nobody, not experts included, can predict the highs and lows. You may not need to do this if you have investments in a range of different asset classes, such as shares or cash. Because these asset classes aren't always moving in the same direction.

If one asset is increasing in value, it could be that another asset is falling. The best way to smoothen your overall returns is to diversify across investments. Although you might miss some of the "upside" by not investing fully in the most performing asset class, this can be offset by the potential impact on your portfolio if the asset experiences a significant downturn.

Diversification may lower your risk

You can protect your portfolio from market fluctuations by spreading your money over multiple investment types. It can smoothen out your returns year-to-year. It can be used in conjunction with a longer-term, more regular funding strategy, such as "dollar cost averaging," so you don't need to spend as much time deciding when it is the right time to purchase or sell an investment.

The bottom line is that nobody knows the future. Diversifying across multiple investments will help you protect your assets instead of relying solely on one type.

How you can diversify?

It can seem difficult to diversify your investments, especially if you don't have much money.

An investor might be interested in a managed investment. The managed investment allows investors to have access to a wider range of underlying assets (cash and fixed income), as well as to a selection of investment managers.

Which level of diversification works best for you?

It all depends on your goals and life stage, as well as your feelings about risk.

One example is to look for investments that increase income while also protecting your capital. Alternately, regular income could be more important than capital growth.

The key point is that diversifying your investments is not easy. This is because there are many ways to do it. Your personal investment goals and strategies will determine which way you choose.