Not many people collect eggs in baskets these days but the wisdom has survived. Spreading the risk by diversifying your investments significantly reduces the risk to your capital
What is Investment Diversification?
1. The first step is to invest in many different companies rather than a small number. Individual company shares are high risk and companies that are household names can fail and disappear.
2. Then, investing across different sectors can protect investors as well as provide opportunities. For example, the technology sector has had a great 2023 but banking hasn’t.
3. Similarly, investing in different asset classes can provide shelter from stock market volatility while delivering returns from other sources. Fixed interest and property investments bring income to a portfolio and assets that often increase in value when shares fall.
Each asset class behaves differently in different market conditions. The right recommendation depends on many factors, including time horizon. So the stability of the investments that may deliver lower returns over the longer term protects investors from higher risk asset classes that are less predictable and can suffer a drop in value, especially in the short term.
The graph below shows this clearly, illustrating the effect that investing in a combination of bonds and shares has had since 1901. The more that was held in shares, the higher the potential losses in value in the short term, but the higher the average and total growth over the longer term:
4. Geographic diversification adds currency to the equation, which can be a positive or a negative but in the same way provides the opportunity to benefit from the reality that different economies operate independently and deliver different results.
What Diversification Does
You can see that the broader the investment spectrum, the more losses in one area are balanced with gains elsewhere. This can make short term volatility more palatable allowing investors to stand a better chance of achieving growth in all areas in the medium to long term.
How Do I Diversify My Investments?
Speaking to an adviser and investing through collective funds is by far the simplest, quickest and most cost effective way to diversify your investments.
We start with a comprehensive assessment of how you feel about investment risk, and then tailor a portfolio to give you the maximum opportunity for growth, while staying well within your comfort zone for short term risk.
If you are looking to invest for the first time, or are an existing investor and you want to review your investments or your risk profile, you can contact our team here: https://gag-ltd.com/contact/