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DIVERSIFICATION
In investment terms, diversification refers to the spreading of an investor’s investment monies across a number of different investments in order to reduce risk. Diversification is jargon for ‘not putting all your eggs in the same basket.’
Diversification can be achieved by:
- Spreading investment capital across different asset types. For example, property, shares, fixed interest and cash,
- Spreading investment capital across different economies to protect against poor economic performance of a particular country,
- Spreading investment capital across different sectors within a particular asset class. For example, within property; investments can either be direct or managed, and can be in residential, commercial or industrial property. In terms of shares, investments can be diversified by investing in a wide range of individual securities (most easily achieved by investing in a Managed Fund), investing in different industry sectors within the market, such as building, transport, industrial v mining, or by investing in companies of different sizes, for example, large caps, small caps etc.
- Spreading investment across a number of different managers, as many managers have distinctly different management objectives, styles, and approach. The returns and volatility of an investment portfolio can be smoothed with this kind of diversification.
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