By definition, the word diverse shows a great deal of variety; very different according to the Oxford dictionary. Seasoned and new investors alike can struggle to understand the perks of a diverse investment portfolio, choosing instead to focus upon gaining returns from very similar opportunities where they consider themselves experts. Whilst having experience with certain types of investments is no bad thing, not expanding your horizons can be detrimental to your portfolio as a whole. Having an investment strategy in place will enable you to create a balanced portfolio that suits your level of risk whilst simultaneously creating a varied mix of different opportunities you may have once not considered.
What is an investment strategy?
As an investor you will have a profit objective or goal you’d like to reach via your investment efforts. To get there you can adopt different behaviours, rules and methods to ensure your portfolio is tailored to your specific needs. For the majority of investors, the aim is to develop a portfolio that strikes a perfect balance between risk and return. An investment strategy is a tool for financial success as it allows for clear planning bespoke to an individual investor.
Why is portfolio diversification important?
There is no rule stipulating that investment success can only be achieved through having a diverse portfolio. There are countless investors who funnel their money solely in property or specialise in alternative investments only. However, there are some scenarios where diversifying your portfolio could be of benefit to your portfolio in the long-term.
Typically, if you are heavily invested in a company’s shares, you have spare cash or all your savings are in a single account, you would be considered a candidate for portfolio diversification.
The benefits of a diverse portfolio
- Relying on one investment for income is a risky. If you have a variety of investments, you have a greater opportunity for success. Investments can fluctuate and sometimes you can be left disappointed with how one is performing. However, portfolio diversification means you can see returns from other channels when others aren’t proving as fruitful.
- Whilst you will likely invest to generate returns, there are some investors who hold capital preservation just as highly. Depending on your goal, portfolio diversification can be a method of preserving your invested money and its cumulated returns.
- As an investor you understand that you can lose money at ever time. Creating a diverse portfolio can keep loses to a minimum as you have opportunities to fall back on when an investment fails.
- Diverse portfolios are usually more stable which can make them less exciting for investors who enjoy risk. However, for the more prudent, having a variety of settled investments is attractive as it means little maintenance over long periods of time.
Asset class diversification
One of the most common ways in which investors diverse their portfolios is by asset class. Each asset class has different levels of associated risk and profitability which means you can create an equilibrium between typically high and low performers when considering both qualifiers. Classes can include but are not limited to:
- P2P lending
- Alternative investments (art, antiques, wine, gold)
Should I diversify my portfolio?
No two investors will have the same portfolio; each is unique and meets the requirements of the individual. Your investment strategy should act as a roadmap of where you want your investment journey to take you and how this will be achieved. By carefully balancing the investments in your portfolio you can build towards your long-term investment goals. However, if you are ever confused or require clarity regarding your portfolio or investments seek the advice of an independent financial adviser.