Today we’re talking about diversification. Firstly, what is it? Diversification involves spreading your money around among multiple asset classes and holdings to limit your exposure to any one investment (such as property and stocks). The aim here is to reduce the volatility of your portfolio because when one asset is falling, others may be rising, offsetting some of the losses on the declining asset. The classic pairing for this is stocks and bonds.
It’s also important to have diversification within each asset class. For example, I met with someone this week who has 100% of his rather large portfolio invested in stocks of just one company in the UK. His risk here is huge – there is company risk, sector risk and geographic risk to contend with. Your strategy, quite simply, should be to minimise each of these risks by investing across different geographies, sectors and companies.
Diversification: in summary
Diversifying your portfolio helps balance risk and reward in your investments and helps ensure you stay safe when investing your life’s savings.
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