Why diversifying investments is a crucial part of any strategy

There are a variety of choices when looking to make investments: across industries, types of assets and even in different locations. But conventional wisdom in finance is clear on the fact that investing in one or two of these exposes yourself to a higher level of risk.

Seasoned investors often choose a strategy that spreads their money across a range of investments in order to minimise risk. Here is how to invest in a way that helps you to find a balance between risk and return.

Understand that investments behave in different ways

Various factors are in play for different types of investments and these can include interest rates or general economic policy, as well as from conflicts and even natural disasters. A positive for one investment does not mean the same for the other and conversely, can occasionally lead to a negative outcome.

Because such a high number of factors are involved in determining how well our investments perform, it is important to diversify so that when one investment falls another may rise. The difference between your worst and best-performing assets is often huge which means it can be vital to diversify your portfolio.

 

Check where your investments are

If you have already started to dabble in the world of finance, such as in a stocks and shares ISA or in your pension, then you should be checking where your money is going. Should these funds be invested in a quite narrow selection then you could be taking on unnecessary risk.

When looking at changing this up, do not allow yourself to be tempted by the prospect of short-term returns on specific asset classes. Generally speaking, investments should take a long view and what is most important is the overall performance of your portfolio.

Remember: the asset class that performs best is liable to change each year and an individual asset class can vary wildly in how well it does from year to year.

Delegate to the experts if unsure

Even if you have the knowledge and free time to manage your portfolio, it remains true that paid professionals in finance have the tools and insight required to build a really good strategy. This can be in an already-built diversified fund but these are often tailored to individual needs.