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With the ability to guard your initial investment but also grow that capital to a level that would not have otherwise been attained, having an investment portfolio can help you gain a strong foothold over your financial future. But markets are often volatile and unpredictable. How can you protect your portfolio and assets from taking a big blow? You diversify. An investment portfolio containing investments with little or no relation to each other, also known as low correlation, is in less danger of being heavily impacted upon by negative value fluctuations in any one company, sector, country or asset. One proven way to spread risk comfortably throughout your portfolio is to make sure you sufficiently diversify your investments. Diversifying your investment portfolio often enables falls in the value of one investment to be cushioned by rises in the value of another, unrelated investment. Read along to discover the ins and outs of portfolio diversification and how to go about diversifying yours.
Investment portfolio diversification is a tried and tested technique that involves reducing risk by spreading investments across a varying range of companies, sectors, geographical locations and assets so that you can increase your odds of investment success. In practical terms, when the economy is growing, stocks tend to outperform bonds, however, when things are running at a slower pace, bonds tend to do better than stocks. As a result, by holding both stocks and bonds, you reduce the chances of your portfolio taking a big hit should markets swing one way or another, while at the same time, by spreading your capital amongst different investments, you do not have to rely on any single investment for all your returns.
As expected, diversifying your investments is not an absolute buffer against financial losses, however, it remains a vital strategy for minimising risk. Some additional benefits include:
Wondering whether your portfolio is diversified enough? Your financial advisor should always be your point of reference when it comes to managing your portfolio, however, one way of determining this yourself is to look at your current performance. Diversified investments do not move in the same direction at the same time, so if some of your investments are going up whereas other down, this is a good indication that your portfolio is diversified.
Diversify your company investments Avoid investing all your money into a single company. In today’s uncertain economic climate, even the most prosperous of companies can suffer a fall in value or even fold. Always spread your investments across a number of companies and consider investing in those that operate in different market sectors. Make sure you conduct thorough research into any company you are interested in and always seek the advice of an independent financial advisor prior to making a final decision. Diversify your sector investments Investing in a range of different sectors brings the same advantages as investing in different companies. However, considering the various peaks and troughs that a wide range of sectors have gone through, you should spread your investments across sectors with low correlation. For example, if your investment in a company within the education sector suddenly experiences a dip in value, a rise in your gold investment could compensate for it.
Diversify the geographical locations of your investments A good way to minimise the effects of stock market movements is to spread your investments across different countries and regions. Placing your faith in the economic stability of a single country and the financial policies of its ruling government is risky. Here again, it is important to conduct research into the stock markets of different countries and get expert advice. Calculate the risks involved before choosing to invest abroad, while bear in mind that some less developed markets are more volatile than others and can be affected by systemic risks. Diversify your assets Make sure you have a good mix of varying asset types within your investment portfolio. There are many different types of assets, the primary being shares and bonds, which often have a low correlation to each other. You must also decide the level of risk you are willing take. Are you nearing the time you would like to draw upon your invested money? Then go for safer investments. If you are planning a long-term strategy, you may feel inclined to take more risk. Irrespective of your choice, remember that your portfolio must align with your financial goals.
Just as lack of diversification can cause problems so can over-diversification. An over-diversified portfolio is one that is invested in a large number of different asset classes. While diversification can protect your investment portfolio from value fluctuations in correlated investments, over-diversification can lead to you not having enough invested money in a company or sector so that you can truly benefit from any growth. When there are too many investments, individual results are limited if one of them rises rapidly since that specific asset only represents a small fraction of the portfolio. No matter how well diversified a portfolio is, risk can never be eliminated completely. The key is to strike the right balance between risk and return which will ensure that you still achieve your financial goals with the added piece of mind. Yet, for some investors, balancing a diversified portfolio is a complicated feat that requires experience in order to avoid limited rewards due to trying to mitigate the risks. Speak to one of our advisors to ensure that your portfolio is diversified enough so that you can reap the benefits and make your money grow.
Disclaimer
The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly, any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views, or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views, or opinions appearing on this website.
Calamatta Cuschieri Investment Services Ltd is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act.
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