The key to successful investing is to maintain a good balance between risk and return.
To maintain this balance, an investor should never put all their eggs in one basket. Instead, they should share their eggs out into a number of different baskets, which is referred to as ‘asset allocation’.
These ‘baskets’ will be made up of a wide mix of investment types, markets and industries, which can be broken down further into investments from different countries, different sectors of the same market and different asset classes.
Each investment will perform differently under different economic conditions. So, rather than being faced with a heavy loss should you invest in a particular sector that performs poorly – like the banking sector in 2008 – a more diverse portfolio can help to protect you from the ups and downs of the market, softening the blow of any losses and potentially even making up for it in another area.
Of course, that doesn’t mean to say well-diversified portfolios aren’t at risk from market movements, as all investments can fall as well as rise, but a portfolio that’s diversified will generally move less and produce more balanced returns – both gains and losses.
For more information on creating a diversified portfolio, head over to the financial guides section of our website.