Spreading your capital across different investment classes to minimise risks of capital loss in your portfolio
Managing Your Risk/Reward Trade-Off
By diversifying your funds across asset classes ensures you do not have all your eggs in one basket, therefore if one investment class performs poorly during a certain period, the other investment is non-correlated and any price movement of one asset has no effect on the price movement of the other asset.
Benefits of Diversification:
- minimising risk of loss – diversified portfolios hold less risk than a more concentrated one, as discussed if one particular asset performs poorly in the market, this has no effect on an asset from another class. This allows you to reduce losses in your portfolio as a whole
- preserving capital – depending on your life stage (e.g. closer to retirement. different set of goals v accumulation life stage) you may require more preservation of capital as opposed to more return driven, diversification can help protect these savings reducing overall risk of portfolio
- generating returns – as your not relying solely upon one type of asset for income, by diversifying allows you to add riskier (growth) assets to generate returns without increase overall risk levels within your portfolio
With all investment comes some risk, having an appropriate strategy in place with the right diversification allows you to minimise and spread the risk.