Investing: Diversification

What if one bad investment didn’t have to ruin your whole plan? Every investment carries some risk and markets affect them in different ways. You can avoid this by diversifying your investments to help smooth out the bumps along the way. Diversification involves spreading your money across different assets to reduce risk. Instead of putting all your eggs in one basket, you distribute your investments so that poor performance in one area can be balanced by better performance in another.

Diversification means your investment portfolio is made up of different kinds of assets. Having a range of assets will, on average, bring higher returns and lower the overall risk. If you invest in just one type of asset, they’ll usually move in the same way. This is called correlation. For example, if you only invest in tech companies and the tech market struggles, then all your investments could lose value at the same time. That’s why it helps to mix things up with non-correlated investments, things that don’t always move together. If one goes down, another might hold steady or even go up. This reduces the chance of everything falling in value at once. You can diversify across different assets like shares, bonds, property or even cash. You can also spread your investments across different countries and industries.

The easiest way to do this is through investment funds, which automatically spread your money across lots of investments. Many beginners start with a low-cost global index tracker fund, which gives instant access to hundreds of companies around the world. It’s easier to diversify using investment funds as these instantly spread your risk among lots of investments. You can also buy a few funds to spread your risk further. Many beginners start by investing in a low-cost global index tracker fund, that gives instant exposure to hundreds of shares in companies around the world.

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