Freezing out risk: Diversifying your investments to weather economic storms.

Arguably the most important principle of investing is to spread your money across a range of different investments. Doing this means that if one or more of your investments grows, you will benefit. However, if they fall, there should be some protection because, hopefully, some of your other holdings will be increasing in value.

Diversifying doesn’t mean shortening the period you invest over. You should always be investing with the medium to long term in mind (at least five years).

Having exposure to all the four main asset classes

Having exposure to all the four main asset classes – cash, fixed-interest securities, property, and equities – will help reduce the overall level of risk of your portfolio. If one part of your portfolio isn’t doing well, the other investments you’ve made elsewhere should compensate for those losses.

Diversification means ensuring that you’re not relying on one of the asset classes too much. This helps to protect your overall investments and reduce your overall risk of losing money.

Spread your investments

Further diversification can be achieved by spreading your investments over different geographical areas. If you invest in companies from different countries then even if, your UK investments are performing poorly, it might be flourishing in another country or region. You can take this up another level by investing in different sectors. Therefore, if manufacturing underperforms in several countries at once, other sectors you’re investing in could be outperforming their markets.

However, you need to be comfortable with the risks involved when investing in different countries or regions. For example, emerging markets such as Brazil, Russia, India and China are likely to be riskier than developed markets such as the UK and US.

Consider collectives

By investing in collective investments or funds, means your money is invested in combination with other investors and in a range of different holdings. Some funds focus on a specific area, type of investment or sector, while others are more general and invest across several regions and sectors. This helps diversifying your investments.

Why diversify your investments?

Diversification doesn`t mean that your investments will be immune from losses, but it can help you spread your overall risk. It is impossible to eliminate all risk completely. You should find a spread of investments and a level of risk and return that you’re comfortable with.

You can achieve all the benefits of full diversification by investing in a Portfolio of collective investments constructed and overseen by your adviser.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.