Investing can help you grow your money, but it can also be risky. One way to manage this risk is through diversification.

In this article, we’ll explain what diversification is, why it’s important, and how you can use it to make your investments safer.

What is diversification?

Diversification means spreading your money across different types of investments. It’s like not putting all your eggs in one basket. If one basket falls, you still have eggs in other baskets. By doing this with your money, you reduce the risk of losing everything if one investment doesn’t do well.

Why is diversification important?

The main reason for diversification is to protect your money. It’s hard to predict exactly how any single investment will perform.

By diversifying, you lower the chance that a big loss in one investment will hurt your overall savings.

Diversification can also help you get more steady returns over time. While some investments might go down, others could go up, balancing each other out. This balance helps your money grow steadily rather than having big ups and downs.

How diversification works

You can diversify your investments in several ways:

• Different types of investments: Invest in a mix of things like stocks, bonds, real estate, and commodities. Each type has its own risks and returns, which can help balance your portfolio. For example, when stocks are performing poorly, bonds might still provide stable returns, helping to protect your overall investment.

• Different countries and regions: Spread your money across various countries. Problems in one country might not affect another, so this can help reduce risk. Investing in international markets allows you to benefit from growth in different parts of the world, which can sometimes offset losses in your home market.

• Different industries: Invest in various sectors like technology, healthcare, and finance. Different industries perform differently at different times, so this can help protect your money. For instance, if the technology sector is struggling, the healthcare sector might be doing well, balancing your overall investment performance.

Role of a financial adviser

A financial adviser can help you create a diversified portfolio that fits your needs. They know the market and can suggest good investment options. They can also help you check and update your portfolio to keep it on track with your goals.

Common diversification strategies

Exchange Traded Funds (ETFs)

These funds track a market index and are already diversified across many companies. They are an easy and cost-effective way to diversify.

By investing in an index fund or ETF, you can gain exposure to a broad range of stocks, which reduces the risk of any single stock negatively impacting your portfolio.

Mutual funds

These are managed by professionals who invest in a mix of stocks, bonds, and other assets. They provide diversification but might have higher fees.

Mutual funds offer the advantage of professional management and can include a wide variety of investments, which helps in spreading risk.

Personalised portfolios

If you have more money to invest or specific goals, a financial adviser can help create a personalised portfolio. This is a mix of investments chosen to match your risk level and goals.

Personalised portfolios are tailored to your unique financial situation and objectives, ensuring that your investments are aligned with your personal risk tolerance and future plans.

Potential pitfalls to avoid

While diversification is a great strategy, there are some common pitfalls you should be aware of:

• Too much diversification: Spreading your investments too thin can be counterproductive. If you invest in too many different assets, it can dilute your returns and make it harder to manage your portfolio. It’s important to find a balance that provides enough diversification to reduce risk, but not so much that it becomes unmanageable.
• Ignoring fees and costs: Different investments come with different fees. High fees can significantly reduce your overall returns. For example, mutual funds often have higher management fees compared to index funds or ETFs. Always consider the costs associated with your investments and opt for more cost-effective options when possible.
• Not understanding your investments: Investing in assets you don’t fully understand can lead to poor decisions. It’s essential to do your homework and understand what you’re investing in. This includes knowing the risks involved and how each investment fits into your overall portfolio. Blindly following trends or taking advice without understanding can result in significant losses.
• Lack of regular reviews: Diversification is not a one-time task. Your investment needs and market conditions change over time. Regularly reviewing and adjusting your portfolio is crucial to ensure it remains aligned with your financial goals and risk tolerance. A financial adviser can help with these reviews and suggest necessary adjustments.

In summary

Diversification is a key strategy for protecting your investments and achieving steady growth.

By spreading your money across different types of investments, you can reduce risk and benefit from the growth of various markets. While diversification doesn’t eliminate risk completely, it helps manage it and makes your investments more stable.

If you’re not sure how to diversify your portfolio, consider talking to a financial adviser. They can provide advice tailored to your needs and help you build a diversified portfolio that matches your financial goals.

Remember, successful investing is about managing risk and ensuring long-term stability.

Next steps

Take some time to review your current investments. Are you diversified enough? If not, it might be time to make some changes.

Consider meeting with a financial adviser to discuss your diversification strategy and make sure your investments are working towards your goals.

Important information

The information provided in this article is for general informational purposes only and should not be considered as financial advice. Investment involves risk, and it is important to conduct your own research or consult with a qualified financial adviser before making any investment decisions. The value of investments can go down as well as up, and you may not get back the amount you originally invested. Past performance is not indicative of future results. Tavistock Investments does not provide personal investment advice and is not responsible for any actions taken based on the information provided in this article.