Diversification, explained: why spreading your money matters
Diversification is one of the oldest ideas in investing. Here is what it means, how it works, and what it can and cannot do.
By Rainsbridge
1 min read
For information only. This is not financial advice or a personal recommendation.
"Don't put all your eggs in one basket" may be the most repeated piece of investing wisdom. Here is what it actually means in practice.
The idea in one sentence
Diversification means spreading your money across different investments, so that a fall in one is less likely to do serious damage to the whole.
Ways to diversify
- Across asset types. Shares, bonds, property and cash tend to behave differently in different conditions.
- Across countries and regions. The UK makes up only a small share of global stock markets.
- Across companies and sectors. Owning many companies in many industries reduces reliance on any single one.
- Across time. Investing regularly, rather than all at once, spreads the price you pay.
What diversification cannot do
Diversification reduces the risk that comes from any single investment. It cannot remove the risk of markets as a whole falling, which happens from time to time. A diversified portfolio can still lose value.
Questions worth asking
- How much of my money depends on one company, sector or country?
- Do I understand what each of my investments is designed to do?
- Does the overall mix reflect how long I plan to invest for?
If you are unsure how these apply to you, a regulated financial adviser can help.
