INVESTING

Diversifying Your Investment Portfolio

One of the most common sayings when it comes to investing is to diversify your portfolio, but do you know what it really means? According to an article published by Fidelity, diversification is the concept of spreading your investing money across different types of investments. Think of it as the common analogy of not putting all your eggs in the same basket. It is not advised to invest in only one asset, but let’s explore why!

What are the benefits?

The main benefit of diversifying an investment portfolio is to help reduce risk and steady returns. Let’s say we have two people. Person A has only one investment in their portfolio, while Person B has 10 different investments in their portfolio. Whose portfolio comes with a higher risk? If you said Person A, you would be correct. Their entire portfolio is dependent on how that one investment performs in the market, meaning if that asset tanks so will Person A’s earnings. By spreading their investments across 10 options, Person B has diversified their portfolio and added flexibility for the performance of their investments. This means that if some investments end up doing great, others remain neutral and some are losing money, the portfolio has a greater potential to balance out.

One important thing to be aware of is that diversification does not get rid of all risk. Any investment comes with systematic risk due to factors such as the overall economic conditions and political instability. Unsystematic risk comes from diversification as it is correlated with specific companies, industries or countries.

How can I diversify my portfolio?

An individual’s approach to diversification will vary depending on their investing strategy and financial goals, but here are some general methods you can consider.

• Hold different asset classes including stocks, bonds, precious metals, real estate and others.
• Invest across a variety of industries, sectors, companies and markets.
• Consider exchange traded funds (ETF) or mutual funds for baskets of individual investments that are typically built to be already diversified.

I like to think of diversification as eating at a big holiday dinner. You wouldn’t want to fill up on appetizers before you get to the main course, sides and even dessert. Instead, make sure to get a little bit of everything on your plate!

Sources:

https://www.fidelity.com/learning-center/trading-investing/diversification

https://www.investopedia.com/investing/importance-diversification/