Diversifying your portfolio

It is never the wrong time to start thinking about diversifying your investment portfolio.

One of the keys to investment success lies in knowing how to diversify as a precautionary measure before it becomes a necessity.  However, being overly cautious can limit your capacity to attract good returns.

The real art to amazing investment portfolios lies in knowing how to strike the perfect balance between caution and risk.  This is known as your “risk tolerance” or “risk profile”.  Ultimately, this will depend on what your investment goals are.  The trick is making sure that your actions are aligned with your determined risk tolerance and you are not making rash decisions.

In good times, it may seem that you should diversify by entering into high-return investments.  However, it is always advisable to retain a portion of your portfolio in an asset class that is subject to minimal volatility because downturns can and do happen.

As far as shares go, general guidelines state that you should aim not to have a significant concentration in one industry and to spread your investments between several different companies.

Diversity between asset classes is also important to creating a robust portfolio.  As a general rule, bonds and shares tend to move in opposite directions so by spreading your portfolio between both, you will be better protected from market volatility.  A certain degree of geographic diversification is also advisable in order to insulate your portfolio from any domestic downturns.

It is hard to overstate the value of professional advice in diversifying your investments.  Even if you are a confident and able investor, it never hurts to get a second opinion.