The Importance of Diversification

This aims to protect you from being overexposed, while looking to generate growth over the long term. Although, it’s important to remember that investing always involves a degree of risk. This means the value of your money can go down as well as up, and you could get back less than you paid in.

Markets are inherently unpredictable. One type of investment may soar while another stumbles, and these patterns can shift dramatically from year to year.

Diversification helps you avoid the pitfalls of putting all your eggs in one basket. Instead, it aims to provide a degree of stability, where investment returns in one area could offset losses in another. This balance could potentially lead to smoother returns over time and greater resilience during periods of bad performance. In a nutshell, it’s a responsible way to manage investment risk – which will look different from person to person, depending on your individual risk appetite.

Diversification can be achieved through different means – all of which impact your money differently. Here are some common ways to diversify:

Asset classes can be spread across different parts of the world. For example, you can buy stocks and shares in companies from global regions, such as the US, Japan, or emerging markets like India or Brazil. This can be an effective way to manage against political, societal and economic change, all of which have could affect your potential for future returns.

Asset classes can be further split by theme or industry. For example, this might involve stocks and shares in technology companies, or sustainable companies with a focus on their environmental impact. 

There are also different types of bonds available, and commercial property can be split by purpose – such as office space, retail, leisure, or industrial. Spreading your money over different sub-sectors and themes can help provide an even greater degree of diversification. It might even allow you to align your money with certain values you hold.

Investment funds do a lot of the heavy lifting for you, offering a straightforward and convenient way to diversify. They spread your money over various asset classes, industry sectors and geographic locations, so you don’t have to. There are different types of funds available, each catering for diverse risk appetites and investment goals. You can find out more about investment funds here.

How you diversify might look very different depending on where you are in life. For example, when you’re younger, it might be appropriate to take on a higher level of risk, as you have more time on your side. 

On the other hand, if you’re nearing retirement and looking to start taking an income, it often makes sense to place greater emphasis on money preservation. This will of course vary from person to person. But revisiting how you’re diversified on a regular basis can help manage risk and align your investments with changing goals, responsibilities, and time horizons.