Investing is an important aspect of your financial plan. And one of the key principles of investing is diversification. Diversification allows investors to spread the risk inherent to investing across different kinds of investments, reducing the likelihood of feeling the effects of losses in any one area. You can diversify your investments in a number of ways, and one such way is by utilising a variety of asset classes.
This does not constitute advice and advice should be sought in all instances before acting on it.
The big four asset classes
There are four major asset classes: cash, fixed income, equities, and property. Each asset class has unique characteristics that make them more or less appealing to different investors. The mix you settle on will ultimately depend on your individual circumstance and investment goals.
Cash — the most basic form of investment, usually offers the lowest returns
Fixed Income — typically seen as less risky than equities but also offer lower potential returns similar to cash
Equities — also known as stocks, these are ownership interests in businesses that offer higher return potential which comes with more risk
Property — provides a steady income via rental payments, however subject to market fluctuations which could impact revenue
Spreading your money across different asset classes helps mitigate investment risk because different classes perform differently at different times. So if one area is taking a particularly hard hit, other asset classes will pick up the slack and offset any losses.
Other ways to diversify your investments
Besides spreading your investments across asset classes in an effort to create a diverse portfolio, you can also choose to invest in different industries and even areas of the world to take advantage of high-performing industries and countries.
You can also experiment with your investment symbols by creating a balance of funds. You can split your investment across companies with good growth opportunities while also investing in those that offer value or recovery. By doing this you can create a mix of investments with consistent profits and others with the ability to help recover from losses or make even bigger profits in the future.
How to reduce risk
Another strategy investors can use to reduce the impact of market volatility and investment risk is pound-cost averaging. By spreading out a large sum into regular investment amounts, it helps to smooth out any fluctuations that may hit the market. In the long run, pound-cost averaging can help to reduce the cost of investing as well as increase the chances of positive returns. This strategy also means investors have the ability to buy more shares when prices are low and fewer shares when prices are high. It helps to avoid buying shares at inflated prices.
But remember: no matter what method you use to mitigate investment risk, there is no investment that is completely risk-free, so be sure to check in with yourself and your aversion to risk in each situation.
Get help creating a diverse portfolio
Here at Dental & Medical Financial Services, we are committed to helping our clients get the best possible returns from their investments. If you need help demystifying portfolio diversification or if you just need advice on how to make the most of your investments, get in touch with us today.