Ten investing truths

Diversify

Spread your investments

Diversification is a simple concept: spread your investments across different asset classes, stocks, countries and investment managers.

So why diversify?

Diversify to reduce loss

With a well diversified investment portfolio, you will reduce your loss if an individual stock or even an entire asset class loses ground.

For example, imagine you invested your life savings into a single company. If the share price soared, you could become very rich. On the other hand, if that company went bankrupt, you could lose your life savings.

Diversify to increase your overall return

Various types of investments will perform better at different times.

For example, shares tend to perform well at the up turn in the economic cycle, while fixed interest investments tend to perform better in the latter parts of the cycle. So diversifying across all the asset classes gives you a better chance of achieving a sound overall return.

Three levels of diversification

  • Diversify by asset class - the types of investments you choose such as shares or property
  • Diversify by investment security - the mix of investments you choose within an asset class such as types of shares or properties
  • Diversify by investment manager - the companies that manage the funds you invest in

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