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6 July 2020
When you build a portfolio, it’s normal to invest in what you know best – a few tech names you like or familiar stocks from your home market. But while that might give you a portfolio that feels comfortable, it’s far from bullet-proof. Why? Because it lacks one key element: diversification.
When you diversify your portfolio, you’re spreading your investment money across different assets, sectors, industries or regions. That means your total investment nest egg isn’t weighted too heavily in one thing – so, if your favourite tech stocks suddenly get volatile or your home market takes a dramatic downturn, your portfolio as a whole won’t be so vulnerable.
Flex your investing muscles
Less risk is just one benefit of diversifying your portfolio. Casting your investing net wider – across the globe if possible – also means you’ll be able to catch more opportunities in the financial markets.
Remember the skyrocketing Chinese stock markets in 2014-15? Or the rally in crude oil prices early in 2019? By flexing your investing muscles and adding a variety of assets, you’ll not only keep your portfolio more balanced, you’ll also be better placed to find new opportunities around the globe.
It’s all relative
Once you’ve started diversifying your investments, a little fine-tuning will be in order. Stocks, bonds and other assets such as oil or gold don’t perform in the same way or move with the same trends – and that’s good for your portfolio. So, it’s important not only to invest in different assets, but in assets with low correlation that won’t move up and down in tandem.For instance, “safe haven” assets such as gold and bonds tend to rise in value when riskier assets like stocks decline. If you have both types of assets in your portfolio, their complementary movements can help keep your portfolio on a more even keel when volatility strikes. And it will.
Be careful out there
From flash crashes to interest rate announcements, today’s markets can move in a moment. A single headline or tweet can change the state of play in global markets or jolt an entire sector (no, not even your tech stocks are invincible).Your job as an investor is to create a portfolio that can withstand whatever the markets throw at it. Diversifying is always job 1 – with a healthy mix of assets and global markets, your portfolio can deliver less risk and more opportunities, putting you on the road to your investing goals.
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