Financial markets are unpredictable by their very nature.  Investments, fund managers and entire industries can experience good times and bad.  And its hard to predict exactly when the cycle will turn.

The benefits of spreading or diversifying your money across a range of different investments, including asset classes, industries, sectors, companies and fund mangers, takes the pain out of choosing which investment is best for you.  Diversifying also helps you reduce the risk associated with having your financial future tied to the performance of just one investment.

Spread the load

Putting all your investment eggs in one basket with a non-diversified portfolio can lead to a white-knuckle ride.  When the going is good, it can be very good.  But when the going gets bad, theres nowhere to hide a non-diversified portfolio is vulnerable and will bear the brunt of any downturn.

Diversification involves spreading your investments to minimise your risk.  You can diversify your investments across:

        Asset classes such as cash, fixed interest, property securities, shares

        Industries or sectors such as resources, financial services, and

        Fund managers

The benefit of diversification is that it cushions the blow when any one asset class, industry or fund manager experiences a downturn.  It allows you to take advantage of the peaks while moderating the troughs.  While individual asset classes experience ups and downs a diversified portfolio can iron out the extreme highs and lows to provide smooth upward growth.

Back the winner

When the dust settles at the end of any given financial year there can only be one winner: one investment type that triumphs, one managed fund that out performs its peers, one industry which benefits from the economic climate more than others.

Picking that winner involves an unlikely combination of foresight, market knowledge, timing and luck.  Constantly switching your investments between asset classes is unlikely to reap rewards as you end up feverishly chasing the previous years star performer.

A far safer and more sustainable philosophy is to diversify your portfolio across a variety of investment types.  You still gain from exposure to high-yielding investments, but with the peace of mind that your portfolio is more likely to be protected during downturns.

Think longer term

Many investors start with good intentions and establish a diversified portfolio.  But as time goes by, their portfolio becomes less diversified as they weed out investments that have suffered short-term losses, gradually increasing their risk.

It pays to diversify, whatever your level of market knowledge and ability to control your investments.  Even those able to take a more active role in managing their investments would do well in managing to confine their short-term buying and selling to their specific areas of competence and expertise, while retaining a diversified, professionally managed portfolio.

Broaden your horizons

While diversification is important for all investors, the degree to which you need to diversify your assets is driven largely by your investment horizon and your risk profile.  The longer you have to invest, the higher your tolerance to risk and the more you can withstand the short-term fluctuations of any one particular asset class, industry or fund manger.  Risk-averse investors particularly those with short-term goals should look at diversifying as widely as possible.

To discover how a more diversified portfolio that specifically matches your risk profile can help you achieve your financial goals, talk to us today.