Arguably, the most important lesson you can learn when you start to invest, and something that all investors should learn to master is the art of diversification. Whether the market is bullish (optimistic and powered by economic strength) or bearish (pessimistic and fuelled by economic slowdown and unemployment) a diversified portfolio is the key to a successful long-term investment strategy.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
What is diversification?
Instead of concentrating your investments in one single company, industry, or asset class, diversification calls for spreading your investments across them all. This strategy is great for mitigating risk because money is split across various areas and different kinds of investments, also known as asset classes. It’s a great way to ensure that even if one area of your portfolio is in trouble or is under-performing, you still have other areas to pick up the slack.
If you have access to cash and plan to invest your money for at least five years, consider putting it into shares and fixed-interest securities. Don’t just stick with one company’s shares (like your employer’s) and look for ways to diversify.
If you understand how the different asset classes work together, then you can build a diverse portfolio that will take you through the volatile peaks and valleys of the market.
Diversification within an asset class
Of course, many people understand that you should diversify across different asset classes, but it’s also a good idea to diversify within an asset class. For example, even within shares you shouldn’t stick to just one kind. Spread your investment between large and small companies, domestic and foreign markets, and even different industries.
Here’s where the work comes in: you’ll need to find assets that work well with each other and could potentially balance each other out if needed. This is why you need to explain different industry sectors and company sizes. You shouldn’t focus just on big, established companies, nor should you concentrate on startups. And if your hospitality shares fall, maybe your energy shares will go up — balancing out each other’s performance is the whole idea behind diversification.
Consult the pros
When it comes to investing, it’s important that you have an understanding of what your portfolio is made up of and how it’s performing. If you need help getting started or want to review your existing portfolio, don’t hesitate to reach out to a professional.
Dental & Medical Financial Services is here to answer any questions you have and ensure your portfolio performs the way you need it to in order to achieve your financial goals. Get in contact with us for more information.