Investment Diversification

When investing, one of the most important considerations is how to spread any risk around. Everybody appreciates the logic of not having all your eggs in one basket, but how does this translate into the investment of your money? There are three essential features that a well diversified portfolio must have:

1) Be invested across different geographical areas and market sectors
2) Be invested in different types of asset (cash, bonds, equities etc.)
3) Hold investments that perform differently under the same economic conditions

Using these methods to diversify your investments protects your money in several different ways. If a single company or fund that you are invested in experiences difficulties the impact of this is greatly reduced across the value of your investments as a whole. This principle also extends to market sectors and countries.

Holding a variety of different types of assets helps to reduce risk further because they tend to do well under different market conditions – e.g. if interest rates go up we would expect bond prices to fall but returns on cash to improve.

Following the first two points sets the right conditions for the third point and this provides protection by virtue of the fact that it tempers the volatility you are getting by ensuring that the investments in your portfolio are not all pulling in the same direction at the same time.

So if you invest the same amount in two funds the overall return that you receive will be the average of the two funds’ returns – however, because sometimes one of the funds will be rising in price whilst the other will be falling the volatility of the two funds taken together is actually lower than the average volatility of the funds if held individually. This means that you receive the same performance with lower risk or higher performance for the same level of risk – i.e. you get more bang for your buck!

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To find out how your investments can benefit from diversification contact our Investment Team today on (+350) 200 49750.