Why Diversifying Your Portfolio Is Important
Having a diverse portfolio of investments is important for several reasons. It makes sense, and reduces risk, not to put all your investments in one place or one type of investment. When looking to diversify your portfolio there are plenty of different opportunities to consider. Here we will look at ways of making new investments while adding diversity to your portfolio at the same time.
Why You Should Diversify Your Investment Portfolio
One of the most important aspects of investing is diversification. This is the strategy of spreading your investment across a range of different sectors, industries or investment types. The purpose is to reduce risk and optimist risk-return. In other words, you are not putting all of your eggs in one basket. The more investments you have the higher the chances are that one of them will flourish.
Why A Diverse Portfolio Is Important
There are lots of reasons why a diverse portfolio is important. The main reason is that diversification aims to minimize the impact of any single investment’s performance on the overall portfolio. The idea behind it is that each investment carries varying risk and return potential levels. When one investment is not performing, other investments may offset any losses. This in turn reduces the overall impact on your portfolio.
Diversification reduces the impact of any potential loss by providing you with more than one source of income at a time.
Strike A Good Balance
When looking to diversify you will need to consider your individual investment goals, risk-taking attitude and time horizon. Getting the balance right between these factors is essential. Monitoring your investments regularly and re balancing as needed is necessary to ensure diversification remains effective. Because the investment performance and market changes can fluctuate over time regular monitoring is important to flag up any investments that might need review.
Look At Alternative Investment Opportunities
Investing in alternative investments is one of the best ways to diversify your portfolio. Traditional investments are things like cash, stocks and bonds. Alternative investments are anything different to these traditional offerings. Some examples of alternative investments are hedge funds, private equity, commodities, real estate, venture capital or collectables. By investing in alternative options you will diversify your portfolio and therefore reduce risk.
One alternative investment opportunity to consider is Enterprise Investment Schemes or EIS. EIS is a government-backed fund which helps start-ups and early-stage enterprises to grow. There are many benefits to investing in EIS, the main two of which are diversification and tax relief. Because your investment is spread across different start-ups this can mitigate the risk of investing in single companies and offers diversification
for your portfolio at the same time. There are also tax relief benefits from investing in EIS. You can find out more about EIS as an alternative investment by taking a look at Oxford Capital and their EIS solutions.
In Summary
A diverse portfolio refers to a good mix of different investments across various sectors, investment types, regions and classes. Diversification can be achieved in different ways within a single market or across multiple markets. As always, when making any investment it is essential that you take advice and only invest what you are prepared to lose.
Additionals:
Tags
Share this article:
