DIVERSIFICATION

Diversification is the process of minimising risk by investing money across distinctive asset classes, industries and financial instruments. Risk is minimised as the different areas that you are invested in will respond differently to the same event. Diversifying among asset classes involves investing money in shares, property, bonds and other financial instruments, diversifying within each asset class would then involve the purchasing of shares across different sectors, such as minerals, financials and telecommunications. The premise of diversification is that if one financial instrument or sector performs badly in light of recent economic developments, you won’t lose all your money if your investments are spread across a range of instruments and sectors. A well-diversified portfolio is not designed to maximise returns. It is a diligent means of shielding your portfolio from market volatility. While diversification can assist in the management of risk, risk remains an inherent aspect of investing.  

 

When constructing an investment portfolio, a prudent investor should factor in the following:

Financial instruments

  • Stocks

  • Bonds

  • Managed funds

  • ETFs and LICs

 

Industry type

  • Healthcare

  • Real Estate

  • Software & IT Services

  • Telecommunications

  • Energy

  • Minerals

  • Banking & Investment Services

  • Pharmaceuticals & Medical Research

  • Cyclical Consumer Products

  • Retailers

 

Foreign markets

Although foreign markets are generally correlated with domestic markets, they provide unique exposure to industries and products which may be stifled with risk in the domestic economy. Different markets are influenced by divergent economic factors thereby providing an opportunity to benefit from a foreign product which may not be available domestically.

 

Risk levels

Mitigating losses requires acquiring investments with disparate levels of risk.

Diverisification, wind turbine, the investor's notebook

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