If the question “why is diversifying your investments important?” seems familiar to you, it’s likely due to its similarity to another common phrase: “why shouldn’t I put all my eggs in one basket?”
Among the golden rules for investing is the idea of spreading your funds across a wide range of asset classes. Ideally, taking this approach will mean that should some of your holdings rise, you’ll benefit, and if they should fall, you’ll experience a measure of protection, as some of your different investments in other asset classes will increase in value.
What does the term “diversification” mean?
Diversification is designed to ensure that an investor is not relying on a single type of holding too heavily. This strategy helps protect investments, while overall reducing the risk of losing money.
The four key asset classes consist of property, cash, equities and fixed-interest securities. By selecting assets from each class, investors can potentially reduce the overall risk level of their dedicated investment portfolio. The theory is that if one part of a portfolio is performing poorly, the other holdings made elsewhere will be able to compensate for such losses.
Do you understand risk and return?
Diversification is not a magic bullet or cure-all, and it can’t prevent investors from experiencing losses periodically. However, it can help them to spread their overall risk. It is worth remembering that risk cannot be removed entirely. Any investment made, whether it is in stocks and shares or property, can rise and fall in terms of values, so there is always the possibility of losing money when acquiring different asset classes. The key is for investors to assemble a spread of different investments from a mix of asset classes and establish risk and return levels that they find comfortable.
Assets such as gilts and bonds can assist to offset investments that are riskier, like shares. However, their downside is that they can’t offer an equal potential for high returns. Investors looking for less risk can also consider cash investments, but should the cost of living outpace any interest received, they may find that their money drops in “real value” over a long-term period.
Investments chosen for a personal portfolio should always consider financial objectives, how much risk investors are comfortable with and how long they are looking to invest for – a minimum of five years is advised.
Could you benefit from an expert portfolio management service?
Why is diversifying your investments important? Put simply, it is to balance out the potential risks involved and help your assorted assets work more effectively for you. If you’re seeking a dedicated service for portfolio management in Chester or Shropshire, we can help. At Hartey Wealth Management, our expert team of financial advisors create portfolios that are well balanced in terms of risk and return and are designed to grow your and maintain your wealth over time.
Get in touch today to establish a new portfolio or to receive a second opinion on your existing investments.
