Investment Advice: Diversification Reduces Risk
Most investors know that diversification is an important investment strategy, but many may not be really sure what it means. Edward Jones Market Strategist Dr Kate Warne explains why it’s important, and what steps to take to perfect it.
Diversification simply means owning a variety of investments that typically perform differently from one another. Why diversify? It reduces the risk, or volatility, of your portfolio. Constructing a well-diversified portfolio is one of the most important principles of investing and that it’s particularly important for your ISA, pension scheme and other long-term investments.
Investment Advice: The Importance of Diversification
Many investors understand diversification as “not putting all your eggs in one basket.” If you own a diversified portfolio, you’ll have investments that perform well in certain market conditions but not in others. As a result, you may own investments that are underperforming. It’s the combination of those and others that helps reduce risk and volatility over time. Combining different assets generally does this without reducing the overall long-term return by very much and, more importantly, may help you stay invested when the market is volatile. To learn whether your portfolio’s investments are diversified enough, speak with your financial adviser.
Occasionally, you may be disappointed when an investment you added to improve the diversification of your portfolio performs poorly.
At other times you may be reluctant to add investments you believe might decline short term. However, remember that almost no one can guess correctly when to buy or sell different types of investments. Investing can be full of surprises, which is why owning different baskets of investments is so important. Having the discipline of a diversified portfolio can help you ignore short-term worries and investment fads so you can remain focused on your long-term investment strategy....