When you can diversify your investment portfolio by investing your money across different asset classes – such as shares, property, bonds, and private equity, then you diversify across different options within each asset class. For example, if you buy shares, you buy across a range of sectors, such as financials, resources, healthcare, and energy. You can also diversify by investing your money across different fund managers and product issuers or across different countries and stock markets.
Diversification lowers your portfolio’s risk because different asset classes do well at different times. If one business or sector fails or underperforms, you will not lose all your money. Having a variety of investments with different types of risk levels will balance out the overall risk of a portfolio.
It is worth taking the time to review your investments and look for opportunities to diversify.
How diversification can benefit your investment strategy
Diversification is your best defence against a single investment failing or one asset class that is performing poorly.
If you diversify your investments, when some fall in value, others may rise and balance out the fall. Diversification lowers your portfolio`s risk because, no matter what the economy does, some investments are likely to benefit.
How to diversify your portfolio
To diversify your portfolio well, you need to invest across different asset classes and within different options in an asset class. You can also diversify by investing in different fund managers or product issuers. Review your investments.
List all your investments and there worth. This could include:
- cash in a savings account
- shares
- managed funds
- an investment property
- your home
This will show you which asset classes you are investing in and where you could diversify.
Identify gaps and research other asset classes
If most of your money is in one or two asset classes, research other asset classes. For example, if you own a house, an investment property will not help you diversify. If property prices fall, you will not have any other investments to balance out the fall. To diversify, you could invest in different asset classes such as shares or bonds.
Then within each asset class, make sure your money is invested across the different options available. For example, if you are mainly invested in one sector such as financials, you should research other sectors such as mining, materials, health care, capital goods and commercial and professional services.
The way your fund invests is a good example of diversification. Check your fund’s website or annual statement to see how they invest.
Keep your investments diversified
Over time, some of your investments will rise in value and others will fall. This means you could have more money in one asset class than when you started investing. You could also be less diversified. For example, if your shares go up and your bonds fall in price, you will have a greater portion of money invested in shares. As shares are higher risk, your portfolio will also be higher risk. If you are not comfortable with this risk, it is time to re balance.
How to rebalance
You can rebalance your portfolio by:
- Investing some extra money, such as a tax refund, in an investment you want more exposure to.
- Selling some investments and putting your money in other types of investments.
Selling investments will lead to a capital gain or a capital loss.