Frank Conway, financial literacy expert and founder of MoneyWhizz and Irish Financial Review shares his tips on reducing risk by diversifying your investments.*
Understanding financial concepts
Surveys show that most people struggle with key financial concepts which may affect their ability to protect and grow their money.
What does diversification mean?
Diversification simply means spreading risk by mixing a wide range of investments within your portfolio. A well-diversified portfolio might include shares, commodities, property, bonds and cash.
The reasoning behind this tried and tested risk reduction strategy is that, over time, all types of investments face challenges. Companies come and go. Share prices rise and fall. Oil is expensive one year and cheap the next.
Sometimes even seemingly unrelated world events - a change in rental legislation or climate change - can have a big, negative impact on investment wealth.
Diversification, when done well, ensures that your whole portfolio isn’t vulnerable to these kinds of specific challenges which helps protect your wealth over the long-term.
How to diversify
Wholly invested in company shares? A good strategy can be to spread the risk across different companies, operating within different sectors and across different countries. Better still, you could consider reducing your dependency on company shares by investing in other types of assets -bonds, property, cash etc – as well.
Most investment advisers agree that diversification cannot provide 100% risk-free investing. However, it can significantly reduce risk helping you to reach your long-term financial goals.
Match diversification to your investment goals
You need to bear in mind your investment goals when you diversify. For example, if you’re investing so you can have an income when you retire, you need to choose a strategy that minimizes the risk of loss the closer you get to your target retirement date. One way of doing this is to move out of high-risk commodities and increase your investments in assets such as cash as your retirement age gets nearer.
What to watch out for
Diversification is a process, not a one-time event. So you need to regularly check how well your investment strategy is performing and your timeline to your investment goals. If your investments are not on track to meet your goals then you either need to reconsider your investments or your timelines. Above all, focus on where you are now, where you want to get to and whether or not your current investment strategy will deliver.
Diversifying your investment portfolio can help you to grow and protect your wealth and, if done well, can help you meet your long-term investment goals.