Diversification: The key to riding out market fluctuations

Julie Brownlee, Fsp Invest, 11 Jun. 2015

Tags: diversification, diversify, benefits of diversification, investment strategy, investing,

If you have all your money in stocks and the market takes a plunge, you’re at its mercy.

That’s why diversification is so important when you invest.

So what are the benefits of diversification? And what does diversifying your portfolio entail?

Read on to find out…

The merits of diversification

Diversification means you don’t invest all your money in one type of investment. Instead of putting all your eggs in one basket, you spread your investments.

Then if one part of your investment portfolio takes a hit, other investments may hold their value and others may actually rise in value.

By diversifying, you benefit from offsetting the poor performance of some assets against the better performance of others.

But diversification does come at a cost. It’s a bit like an insurance policy. By spreading your investments, you’re likely to see slightly lower yields than a more concentrated portfolio.

Yet, this cost may be worth it as it helps your portfolio survive the ups and downs of the different markets.

So how can you diversify your portfolio?

As well as shares, you can invest in a range of different assets, such as:

  • Bonds: As they pay a fixed-income, they give your portfolio some stability.
  • Gold: A liquid, real monetary asset.
  • Property: A tangible investment that generates an income.
  • Cash: To take advantage of any investment opportunities that may arise.

It’s also important to diversify within the different assets you buy into. For example, buying a range of different stocks in different sectors and buying different bonds or different maturities.

Another option is to consider investing in different types of unit trusts. This way you can gain easy diversification across a number of different stocks, sectors and asset classes.

So there you have it. Why diversification is the key to riding out market fluctuations.

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