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Investing 101: #5 Strength in Diversity
Everyone’s heard the cautious tale about putting all your eggs in one basket, making diversification one of the most important considerations for investors who want to help spread risk, avoid loss and maximise potential returns.
Diversification is a pretty simple concept really. It aims to balance risk and safeguard your investment by spreading your allocation across a number of assets. That way, you’ll have different investments working across multiple markets all at the same time, which could help make your portfolio more protected as well as dynamic and opportunistic.
The four traditional investment asset classes are:
|Cash||Bank saving deposits.|
|Bonds||Government and corporate. Government bonds come with guaranteed interest rates making them lower-risk.|
|Property||Looking at residential, commercial, industrial or a mix, at home or abroad. Aiming to drive profits through rental income and capital appreciation but performance is dependent on the property market.|
|Equities||Shares or part ownership in companies that trade on the stock exchange.|
There are other types of investments, for example, precious metals, including gold and commodities like grain or coffee. They tend to be for more seasoned investors but some multi asset funds have small allocations to increase diversity even further.
An investor, who opts to put their full investment into a single asset class, like property for example, is exposed to the ups and downs of that market. This means, if there’s a dip or crash in property prices, they could see the value of their investment fall significantly or disappear altogether.
Multi asset funds
One of the easiest ways to achieve diversity is by investing in a multi asset fund that offers a cross section of carefully selected assets and a professional fund management team.
Multi asset managed funds are run by fund managers who make sure your investment is spread well. That way, if there is a drop in one asset class; chances are it won’t affect your entire investment.
So, while you’re busy going about your day-to-day, they’ll be working away on your behalf, weighing up the merits of one set of companies or assets against another, researching new growth opportunities and assessing any market risks, so you don’t have to.
Multi asset funds are also diversified in terms of risk. Where you sit on that scale is up to you, but whether you can withstand little or lots of market turbulence, there’s no doubt, a diversified portfolio is a way to help cushion any potential fall.