Diversification: Why you shouldn’t put all your eggs in one basket
You can’t eliminate the risk of loss when investing but investing in a diverse range of assets is one of the best ways to reduce the risk to your wealth. We explain how to ensure you’re adequately diversified, and why different asset classes can perform different roles in your portfolio.
Diversification is one of the most basic, and important, principles of good investing. In essence, it means making a variety of investments rather than “putting all your eggs in one basket”. If you only invest in one thing and the price of it falls sharply, your overall level of wealth will fall too. However, if you invest in a diverse range of things, you reduce the risk of this happening.
For example, you could spread your wealth across different:
- Asset classes, such as shares and bonds;
- Geographies, by investing in shares in a mixture of countries, or in funds whose professional managers do the same thing on your behalf; or
- Industries, again by investing in a mixture of shares and/or funds.
All of these can be valid ways to improve your chances of offsetting price falls in one area of your investment portfolio with price rises in another.
However, the overall level of risk to your portfolio depends on the proportions of different investments that you choose to put inside. Shares, for example, are traditionally regarded as more risky than other types of asset such as bonds, so if you wish to be cautious with your investments then you may wish to hold a lower proportion of shares in your portfolio.
A sophisticated investor may also choose to diversify within a single asset class. An equities investor, for example, may choose to allocate a specific proportion of their wealth to less-risky developed-market stocks, in order to offset some of the uncertainty of investing the rest of their equities portfolio in the higher-risk emerging markets.
Ultimately, the type of diversification that’s right for you depends on your investment objectives and appetite for risk.
Remember: diversification does not, in itself, guarantee that your wealth will grow or be preserved. All investments can fall in value as well as rise. The overall level of this risk to your portfolio depends on the proportion of each asset class that you put inside. So it’s important to understand how much risk each asset class represents.
If you wish to give yourself the chance of higher returns and are happy to accept the higher level of risk this will involve, you may need to devote a greater proportion of your wealth to higher-risk assets. If, on the other hand, you are more interested in preserving your wealth, lower-risk assets may be more appropriate.
Finally, if you are investing with a specific long-term objective in mind – perhaps to send a child to university in a particular country, or to put a deposit on a property overseas – then you may wish to choose an investment denominated in the currency you’ll eventually need when you come to spend the money. Please note, however, that predictions about currency movements are extremely difficult to make, so this form of diversification should only be attempted by experienced investors. Generally, you should always make sure your cash and low risk assets (bonds) are denominated in your reference currency (the currency in which you typically spend).
What to do next
There are a number of ways in which Barclays International Banking can help you to diversify your investments. You can talk to our team about our range of investment options, by calling +44 (0)20 7574 3212*. Alternatively, if you have a Relationship Manager , they can put you in touch with one of our Investment Advisers. Please note: we cannot offer investment advice to you in the United Kingdom.
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