Why should you have a diversified investment strategy?
You have probably heard the saying – “Don’t put all your eggs in one basket”. The logic here is if a farmer were to stumble while bringing the basket of all the eggs from the henhouse, he will lose most of his eggs and end up in a messy situation.
The same logic can be applied to your investment portfolio. You should not put all your resources in just one investment because if that investment does not grow as anticipated due to market changes, your expected return will suffer. That is why it is important to diversify your investment strategy and lower your portfolio’s risk to help you get more stable returns.
You can diversify by investing your money across different asset classes – such as shares, property, bonds or private equity. Then you diversify across different options within each asset class.
For example, if you invest in shares, you can buy international or domestic shares, large, medium or small cap shares, or shares for dividend return, growth or value. You can also invest across a range of different sectors such as financials, resources, healthcare and energy. You can also diversify by investing your money across different fund managers and product providers.
Diversification lowers your portfolio’s risk because different asset classes do well at different times. If one business or sector performs badly, your overall return will not perform poorly as you will have invested in other better performing assets. Having a variety of investments with different risks balances out the overall risk of your portfolio.
Finding the right investments can be challenging, and a Financial Adviser can help build the right diversified portfolio to suit your needs.
“Got any questions? The FAA Team are here to help!”
John Hehir