In this article we focus upon why having a diverse portfolio is key and the main advantages of ensuring your investments are the correct options for you.

Do I have to have a diverse portfolio?

There is no rule that states an investor must have a diverse portfolio. For instance, there are plenty of individuals who invest solely in property and this works for them. However, some investors in the following scenarios may want to consider diversifying their portfolios …

  • If they are heavily invested in a single company’s shares, such as an employer
  • If they have a lot of spare cash that they don’t require access to presently
  • If all of their cash is in a single savings account.

The advantages of diversification

There are three main benefits of ensuring you have a diverse portfolio. These include:

Minimising potential loss

If you have an investment that performs poorly you have other opportunities to fall back on that may have been more fruitful over the same period of time with a diverse portfolio. Not concentrating your capital under one type of investment is important for curtailing risk of loss.

Preserving your money

All investors have different goals they want to achieve. For some, whilst making money is central, preserving capital is equally significant. Portfolio diversification could help you protect your invested money.

Generating returns

Portfolio diversification means you are not relying on one opportunity for income or capital return. With investments not always performing as expected, portfolio diversification can help you secure a return from one avenue or another.

How to diversify your portfolio

Each investment opportunity has a different level of risk and profitability. Putting money into as many different avenues as possible could help create a stronger portfolio, resulting in a higher chance of gains over time.

There is a wide variety of investment opportunities available to investors that fall into different levels of associated risk; giving investors the choice to choose what suits them best.

Types of investments include:

  • Cash
    • ISAs, savings, premium bonds
  • Bonds
  • Shares
  • Property
  • P2P lending
    • Development, SMEs, start-ups
  • Alternative investments
    • Art, antiques, wine

When it comes to choosing an investment, it is imperative that you select opportunities based upon how much risk you are willing to take. This is unique to every investor and will help shape the way in which your portfolio evolves. There is no right or wrong balance between risk and reward; it truly boils down to the preferences and goals of the individual investor.

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