Choosing your investments is an intimidating process. How do you know if they will make you money or lose you thousands?
If you’re a beginner who wants to minimise your risk while ensuring your portfolio has the potential for growth, then one of the best ways to handle the volatility of your investments is through diversification.
What is Diversification in Investing?
Diversification is an investment strategy that can lower your portfolio’s risk and may help you gain more stable returns over the long-term.
You can diversify your investments across multiple asset classes and different options in those asset classes to suit your personal investment risk tolerance.
Here are the different asset classes you can invest in to diversify your portfolio:
- Fixed Interest (bonds)
- Private Equity
How Does Diversification Lower Your Investment Risk and Benefit Your Portfolio?
By spreading your investments throughout different assets, your portfolio’s risk is usually decreased as different asset classes usually perform well at different times. Thus, if one asset performs badly, you still have your other investments to provide you with adequate returns.
When you rely only on one investment or one asset class, the loss can be more significant.
For example, if you have all your money invested in properties, and the property market were to hypothetically crash, you would lose a lot of your investment income. However, if you had also invested in shares, bonds and other asset classes, the loss suffered from the property market crash would be protected by the rest of your portfolio.
With that in mind, diversification acts as your first line of defence against the volatility of your investment portfolio’s price movements.
But other than lowering the risk, some other benefits of diversification include the following:
- Diversification can benefit investors who are nearing retirement since it can provide protection for your retirement nest egg. For retirees looking to still grow their money in retirement, a diversification strategy can limit the need to take excessive risk.
- You can also choose to structure your investments with some growth-focused investments and some short-term investments, such as cash. This means you can have easy access to some of your money whilst still reaping the benefits of growing your money in the long-term.
- Diversification also maintains the health of your wealth since it ensures you’re not relying on a single investment for your future income stream.
What Factors Impact Your Portfolio?
As mentioned above, the price movement of your assets is constantly changing. This is natural for investment markets and shouldn’t deter keen investors from investing.
It can be next to impossible to determine whether a specific investment will thrive or crash but the following risk factors can impact your investments. If you are building an investment portfolio, you should be aware of these risks:
- Current market conditions
- Interest rates
- Currency markets
Are You Looking for a Financial Advisor in Brisbane to Provide Investment Advice?
If you want expert advice to help you manage your investments, seek financial advice in Brisbane.
HH Wealth aims to take the guesswork out of your finances and investments, so you can focus on making better decisions to reach your financial goals.
We offer financial planning services like ethical investing, superannuation advice, and wealth management in Brisbane, so book your consultation with us and see how we can help grow your wealth in more ways than one.