What is diversification?
by Wealth Know How in DIY Investing
"What is Diversification?". In an ever changing world, there are many factors that can move markets very quickly. We help you to understand what diversification actually means from a personal investment perspective and explain how this can help manage your overall risk.
- sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
Published on 27 Jan 14
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"What is Diversification?". In an ever changing world, there are many factors that can move markets very quickly. We help you to understand what diversification actually means from a personal investment perspective and explain how this can help manage your overall risk.
Sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
-
Venezuela tension heats up
Duration 03:16
-
Aussie dollar surprises market
Duration 03:10
-
Markets climb as investors watch US healthcare bill
Duration 02:31
It’s called ‘diversification,’ and while it doesn’t guarantee that you won’t make a loss if the general direction when markets are down, it can reduce the risks associated with investing.
The world changes every day: unpredictable political, social and economic factors can move markets very quickly and not all markets react in the same. It is best to spread your risk over multiple markets and assets so your whole portfolio does not get caught in any single negative event.
The aim is to hold assets that do not always move up and down together all the time. This is called low correlation – as one investment doesn’t perform, hopefully another investment in your portfolio goes up and therefore creates a balanced result for the portfolio overall.
On any day, some of your assets may win, some may lose, but overall the result should be that the portfolio rises in value in the long term.
But diversification isn’t just a protective measure; it may also allow you to generate a higher rate of return for a given level of risk.
There are several different kinds of diversification. There is diversification within an asset class – as in having a diversified share portfolio of different companies and industries. Then there is diversifying across asset classes – cash, fixed interest, shares and property; and finally, there is diversifying outside Australia.
Studies have shown how you diversify your portfolio – or your asset allocation – can be one of the most important investment decisions you make.