Portfolio Diversification

UNDERSTAND THE ESSENTIALS FOR INVESTMENT

What is portfolio diversification?

Simply put “don’t put all your eggs into one basket.” The goal of diversification is to reduce risk in your investments.

Knowing how and where to start as an investor can be tough … having a plan or a strategy is important. Think about renovating your house, before you get started you have a vision of what it will be like when it’s finished. The same goes for your investment portfolio. You want to set your goals and then have a plan in place on how to reach them.

A fundamental pillar of that plan should be an asset allocation that ensures your investment portfolio is diversified. What does portfolio diversification really mean? It can be summed up quite simply – “don’t put all your eggs into one basket.”

The goal of diversification is to reduce the risk in a portfolio. The rationale behind this is that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment within the portfolio.

Diversification comes along with many proven benefits, however, it does not guarantee an investor protection against a loss. It is also important to bear in mind that diversification does not reduce the systematic risk of investing in a particular market. This systematic risk is what is referred to as ‘non-diversifiable risk’ or ‘market risk’ – it is not associated with a particular company or industry and will include inflation rate risk, exchange rate risk, political instability risk, and interest rate risk.

There are many ways to diversify your investment portfolio – in particular, you can invest in a variety of asset classes. These will include Fixed income, Public equities, Real estate, Private Equity, Hedged funds and so on. However, you can also diversify within an asset classes in order to improve the risk / return profile of your portfolio.

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