The importance of diversifying your investments
Investment always involves a delicate equilibrium between the desired potential gains and the inherent risks. While a heavily concentrated portfolio may generate substantial returns during a financial market boom, it could lead to catastrophic losses in other circumstances. Therefore, prudent investors opt for portfolio diversification to shield themselves from market uncertainties that may impact the performance of specific assets or securities.
Why Diversify ?
Diversification is one of the best ways to manage risk as an investor. To borrow a well-known phrase, it's "not putting all your eggs in one basket."
The highest-yielding products are often the riskiest, while stable products will have a lower return. The role of diversification is to find the right balance between these products to build a portfolio with an attractive return while reducing its risk.
How Do You Diversify ?
A diversified portfolio will include different types of uncorrelated assets so that the gain of others offsets the loss of some.
There are several ways of diversifying an investment portfolio, for example :
- By asset type: You can choose to hold a combination of equities, bonds, and funds. A declining bond market could be balanced with a positive performance from the equity market.
- By geographical area: It will also be possible to diversify risk by investing in different regions of the world. For example, a negative impact on the Chinese economy could leave European equities unaffected.
- By sector : We could invest part of our portfolio in the technology sector and another in consumer staples or utilities.
There are many other ways of diversifying your portfolio, such as by risk profile, currency, capitalization size for equities, or by management style for funds.
Conclusion
It's important to remember that diversification doesn't eliminate risk but does mitigate it. Through diversification, you can build a resilient portfolio with steady, sustainable growth over the long term.
