Diversification: what is it and why it’s important to your portfolio?

Legendary investor John Templeton once said, “The only investors who shouldn’t diversify are those who are right 100% of the time”. So, what is diversification and why should you do it?

In simple terms, diversification of your investment portfolio means spreading your money across assets so that you hold a mix of higher and lower risk investments. The number one reason for diversification is that it lowers overall risk. The more you spread your money out across different assets, the less likely it is that any one single event will negatively impact your portfolio. It’s the classic antidote the “all your eggs in one basket” scenario.

One form of diversification is asset allocation. As a result of having different investment classes in your portfolio – including stocks, bonds, real estate, cash and other commodities – you can help protect your portfolio from losing value.

An example of this in practice is that when stock prices fall, bond prices often rise as investors move their money into what is deemed a lower risk investment. In this instance a portfolio that included stocks and bonds would perform very differently to one that only included stocks.

Adding property to your investment portfolio can be a great way to diversify and is increasingly seen as an important protection strategy for institutional investors. As an asset class, property has long been regarded as the foundation of a balanced and well-diversified portfolio. The property market in general is relatively sheltered and geographical markets are rarely linked.

Another way of diversifying your portfolio is within a specific asset class  – so in property, investing across a number of assets of different tenure types and geography would also ensure there is less likelihood of a single event affecting your overall return.  Here at Propio, we strongly recommend that you diversify your investments across a number of investments – which is much easier to do via an investment platform then through bricks and mortar investment due to the transaction sizes involved.

Diversification methods aside, it’s worth remembering that factors including your investment goals, risk tolerance, time frames and level of investment experience will play a large role in what investments you choose. Please note that risk can never be completely avoided, regardless of your investment strategy and you should ensure you have fully researched any investments before entering into them.