Diversification is a strategy that decreases the risk of investment by distributing your investments between multiple financial institutions, industries etc. The goal of this particular strategy is to maximise returns by investing in sectors that react differently to the same set of circumstances.

With investment diversification the overall risk is lowered as no matter what happens with the economy, some assets will gain. This will offset losses in the other assets.

The Long Term Positives of Investment Diversification And Financial Planning

With air travel cut back due to the pandemic, individuals who have only airline stocks would have seen a considerable drop in the value of their stocks due to the closure of national and international borders. That means that those individuals would experience a drop in their investment value.

On the other hand, someone who has both airline and supermarket stocks are likely to see a rise in the value of their supermarket stocks due to more people eating at home as a result of lockdown restrictions . This may counterbalance their portfolio.

The more uncorrelated stocks in a diversified portfolio are the lower the risk is. This could include different types of companies as well as different types of industries in different locations.

Diversifying across various asset classes can also help to reduce the risk of investing. Different assets such as bonds and stocks generally don’t react the same way to negative events. Bond and equity markets move in different directions so if one is affected by a negative event the other should offset the loss.

Location is another positive factor when it comes to diversification. Investors aren’t just tied to investing within their own borders. Volatility in some countries doesn’t always affect other parts of the world. Therefore investing overseas as well as at home could decrease the risk even more.

Although diversification can seem a little overwhelming at first glance, investment management can assist with creating and maintaining an investment portfolio.

The Downsides

There are plenty of benefits when it comes to diversification but like with most things there are some downsides. Managing a diverse portfolio can be challenging. Especially when an individual owns multiple holdings and investments.

When delving even deeper into diversification the process becomes increasingly complicated. This type of investment is not created for beginners. Although diversification doesn’t prevent a loss it can reduce the impact on an overall portfolio.

In Summary

Investing can be a complicated yet rewarding process with high net worth individuals wanting investment advice in regards to their estate planning affairs or retirees seeking to earn income from their investments. Because individual preferences and circumstances are different it is recommended to seek tailored financial advice. Having a conversation with an authorised financial adviser may be the next step in your personal financial journey.

Retirement Planning With A Financial Planner

If you’d like to find out more about investment diversification and private wealth management services, contact our team at Ethica Private Wealth Specialists. We may be able to help you achieve your financial goals with a Two Hour Free Consultation.

Having a conversation with an authorised representative such as a financial advisor or an investment advisory, who has an Australian financial services licence, may be the next step in your personal financial journey.

This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.