Diversified Investing – Keeping Your Eggs in Different Baskets

“Don’t put all of your eggs in one basket!” You’ve no doubt heard this over and over again when it comes to investing. All successful investors build portfolios using diversified investing strategies, and you should too!

By diversifying it is true that you won’t be investing in winners all of the time but it’s better than being solely invested in a particular investment! No matter how attractive or safe your basket looks, diversifying is important. This means spreading your money in various shares in different industries, or different properties, different bonds, and in money markets and this includes investing in international markets.

By investing in several different markets, you will actually reduce your risk.

Let’s take shares for example. And to keep things simple we’ll say that the average return on shares is 10% (please note simplification for illustrative purposes). While a single company may be a brilliant operator it may also experience trouble and down times. The annual return may fluctuate between minus 40% and plus 60% but averages 10% over time. If you were to invest in that share alone you’d be experiencing the volatile ride of the company’s ups and downs. And you’re probably more likely to want to sell – at the wrong time.

Investing in many different shares means that when one company performs poorly others in different industries may be doing quite well or even very well. Rather than losing all your money in the one share the volatility of the combined portfolio is likely to be much smaller. The fluctuations of shares moving in opposite directions means the poor performers are cancelled out by the better performers and your risk reduced. And you still get the same average 10% return.

If you invest in property, once again it’s best to buy in different areas and different types of building. It tends to be more difficult to diversify in property because of the cost involved so for many this means using managed funds that invest in property.

You can also include different investment styles. Managed funds make it possible for smaller investors to spread their portfolio so diversification is possible at all levels of investment.

Over time, research has shown that investors who have diversified portfolios usually see more consistent and stable returns on their investments than those who only invest in one area.

With diversified investing you will find that you have a lower risk of losing your money, and over time, you will see better returns by keeping all your eggs in different baskets.