Whether you’re a new or a seasoned investor, you’ve probably heard of the saying “don’t keep all your eggs in one basket” or this case don’t put all your money into one venture! It’s highly recommended to diversify your portfolio to reduce your risk. Diversification is an investment strategy that reduces your risk by allocating investments across various financial instruments, industries and other categories.
So, what are the advantages of diversifying?
- Reduce portfolio risk
Minimise the potential amount of risk associated with your portfolio by diversifying. When you invest in different types of assets and industries, you’re overall less impacted when the volatility of the market comes crashing down, which in the long run reduces risk and generates higher returns.
- More opportunities for return
When you diversify, you’re increasing your opportunity for higher returns. For example, if you’ve invested in both domestic and overseas stocks, you can still gain from profits abroad even if your domestic investments aren’t performing.
- Preserving the life of your capital
Investing isn’t all about playing a risky game. With individuals at different stages of life, each individual will have different priorities, for example, those close to retirement may want to preserve their cash capital and diversify to help protect their savings by reducing the risk of an individual investment loss.
- Reduce time spent in monitoring your portfolio
Having a diversified portfolio will usually mean that you can spend less time maintaining it as not all your investments will hit a performance slump at the same time, making for simple management and thus also reducing your risk.
- Benefit from different investment instruments
By diversifying, you can benefit from investing in a mix of debt and equity investments which will in the long-run balance the risk and return related to each of your different investments. If one fund does not perform well, this could then be compensated by profits made from another fund.
- Benefit from Compounding Interest
It’s possible to earn interest on top of your previously accumulated interest just by having a diversified portfolio, due to the principal amount and benefits from compounding interest.
- Easier to shuffle amongst investments
Investors are easily able to shuffle their investments and take advantage of market conditions and movement which in turn reduces risk and increases annual returns.
- Peace of mind
All in all, having a diversified portfolio will bring you peace of mind. Over the long term, a diverse portfolio is more stable overall taking into account the performance average, making it less susceptible to large fluctuations in the market, and this can often help investors not to lose focus or become concerned with a single bad investment decision.
Overall having a diversified portfolio can reduce your risk, while reaping the benefits of having investments in various instruments. Get in touch with us today to find out more!