Guide to Financial Planning: Part Three

DIVERSITY

When investing the next box to tick is diversity. Most people are familiar with the don’t have all your eggs in one basket theory. Nearly every horror story I hear involves a lack of diversity. Whether its putting all your money into a property development or buying and holding onto shares in one  company.

As with timing the market, it’s often difficult to choose which asset class is going to outperform others. This year’s top performer may be next year’s crisis. This is illustrated in the chart showing each asset performance each year. It’s quite easy with hindsight to see where your money should’ve been invested , but not so much without the hindsight.Asset performance each year

By diversifying your portfolio, you can help manage your risk.

The goal of diversification is not necessarily to boost performance—it won’t ensure gains or guarantee against losses. But once you choose to target a level of risk based on your goals, time horizon, and tolerance for volatility, diversification can provide the potential to improve returns for that level of risk.

To build a diversified portfolio, you should look for assets—stocks, bonds, cash, or others—whose returns haven’t historically moved in the same direction, and to the same degree, and, ideally, assets whose returns typically move in opposite directions. This way, even if a portion of your portfolio is declining, the rest of your portfolio, hopefully, is growing. Thus, you can potentially offset some of the impact of a poorly performing asset class on your overall portfolio.

So, so far you’ve taken advice, given the investment time and diversified.

 

 

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