You’ve probably heard the expression “never put all your eggs in one basket”. It sums up one of the ground rules of investing – the importance of spreading your money across different investments.
This process is known as “diversification”.
All asset classes move in cycles – enjoying periods of very strong returns, followed by periods of low returns or even a dip in values.
The thing is, different investment markets don’t all move in the same way at the same time.
When one investment classis experiencing rising values, other investment markets may be going though cooler conditions.
By diversifying – spreading your money across a variety of investments, it’s possible to reduce the risk of losing money if a particular asset class experiences a downturn in values. In this way, your returns are smoothed out, with fewer highs and lows, and any losses are minimised.
Diversifying your portfolio also helps to provide protection against the impact of tax or legislative change.
How to diversify
There is no single right or wrong answer about the way you diversify your portfolio.
The selection of investments you choose will depend very much on your age, income, family situation and lifestyle. It will also hinge on how you feel about risk.
The way you diversify is also likely to change as you travel through different life stages. A younger person for instance may be comfortable having a high proportion of their money invested in higher risk assets. As we approach retirement, it’s likely you will want to reduce the amount of risk you are taking.
Your Mortgage Choice financial adviser can recommend a rage of different investments that are suitable to your needs.
An important point is that you don’t need the money to invest all at once. Slowly drip-feeding cash into different investments so that your portfolio is built up over time is a sensible strategy that reduces the impact of any market swings.