If anything can be taken out of the tumultuous recent markets it is that diversification matters. When it comes to saving and investing, whether for the short, medium or long term, one of the most essential principles to understand is diversification. Whether you’re saving for retirement, a home, or your child’s education, diversifying your investments isn’t just smart, it’s a must.
In plain English, diversification means spreading your money across different assets to reduce risk. It is the investment world equivalent of “don’t put all your eggs in one basket.”
Why does diversification matter?
No matter how well a particular investment performs today, there’s no guarantee it will do so next week or even tomorrow. Markets by their nature are unpredictable. Diversification helps protect your portfolio from the volatility of individual asset classes. If one part of your portfolio takes a hit, the others may help cushion that blow.
Some assets may offer high returns over the longer term but can be extremely volatile in the shorter term. Others, like bonds, usually provide more stable returns but with less growth potential. The aim of diversifying a portfolio is to balance growth and stability.
Are there different types of diversification?
While asset class diversification tends to be considered most often, there are several ways to diversify a portfolio.
Asset Class – This involves spreading money among different types of assets such as stocks, bonds, property, and cash. Each of these assets behaves differently in response to economic events.
Geographic – Investing globally ensures that a portfolio isn’t overly reliant on the performance of a single country’s economy. While the U.S. market might be down, Irish or emerging markets may be doing well.
Industry – It’s wise to invest across various sectors like technology, healthcare, finance, and consumer goods. If one sector suffers due to regulatory changes or product issues, others might remain unaffected or even benefit.
Company Size – Small-cap companies can offer higher growth potential but also come with higher risk. Large-cap companies tend to be more stable. A mix of both can offer a more balanced approach.
Is there a link between diversification and risk?
Yes there is but unfortunately no investment strategy can eliminate risk entirely. However, diversification helps manage it. Having a diversified portfolio can help smooth out the bumps along an investment journey. This is especially important in times of market uncertainty, for example the recent market turmoil due to tariffs or geopolitical instability as witnessed in Ukraine, a diversified portfolio is better equipped to weather the storm.
What is the best way to diversify a portfolio?
Diversification is more than just randomly spreading money around. It should align with your financial goals, risk tolerance, and time horizon. Younger investors might afford more risk and choose a portfolio accordingly. Someone closer to retirement would select options that provide less risk to protect their investments.
There are many multi-asset portfolio products available covering different risk levels. These offer an excellent ready-made solution for pensions, savings and investments alike. To consider the options that are right for you and your business and align with your goals, just book a free, no-obligation chat with our experts where we find out a bit more about you, explain our services, and how we could work together, or complete the form below and a member of our team will call you back.
