Why is Creating a Diverse Investment Portfolio So Important?

Investing can seem difficult to understand from the outside. For the average consumer, investing is best left to the professionals – with investment funds available via banking organisations and brokers. An increasing number of consumers are taking matters into their own hands, learning the mechanics of trading and actively building their own portfolio. But building a portfolio without a strategy can be dangerous business, and a diverse portfolio is key to protecting gains.

What makes a diverse investment portfolio?

A diverse investment portfolio is one which comprises a wide variety of assets and investments, across a number of trading channels. Low-risk safe haven investments in larger entities and corporations are coupled with smaller, high-risk investments in more volatile markets to spread capital gains and appreciation, maximising chances of robust returns across your portfolio.

Why is diversification important?

Having a diverse portfolio is about mitigating risk. If you as an investor place all of your money into a single asset or closely grouped set of assets, the risk of suffering losses is higher than in your money is invested in a number of areas. For example, if you were to invest solely in tech-related company stocks, and the tech industry suffered a market crash due to industry disruption, the entirety of your investment portfolio would register a loss. If instead tech companies formed a small part of your overall portfolio, the tech crash would only affect a fraction of your investments.

How can you diversify your portfolio?

As an investor, there are several ways you can approach portfolio diversity. First and foremost, you can carry out research in several industries and markets and buy widely as opposed to deeply. Avoiding investment in related or rival companies can help you avoid investing in the same sector.

Another common option used by more experienced investors is spread betting. Spread betting is a method used for speculating on a variety of markets at once, with the added benefit that ownership of assets is not required to profit from market movements. Even in the event of a misjudged market movement, the majority of the spread bet is protected from the resulting loss.

Evaluating risk

Another key feature of diverse investment is the evaluation and management of risk. Low-risk options offer the highest chance of positive returns over time, but at a low rate of appreciation. Broker Dodl explains that more volatile markets can offer higher short-term returns at the expense of security. A diverse, growth-oriented portfolio makes the most of both camps, keeping returns relatively well-protected with stable investments while generating iterative gains with higher-risk strategies.

Risk in practice

Safe haven investments can be found in the stock market and in forex. For the latter, stable stocks are those in companies that provide an essential service – for example, household goods or food. For the latter, stable currency pairs can be found in the main global currencies, such as the dollar against the euro. Volatile investments can be made regarding movements in currencies with a smaller footprint, or in industries experiencing disruptive growth.