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The benefits of diversification: Building a strong portfolio
Investing is an essential part of building wealth and securing financial stability, but investing involves certain risk factors, and the possibility of losing money is always present. One way to mitigate this risk is through diversification of your investment portfolio.
Diversification is the practice of spreading your investments across different asset classes, industries and geographies. By doing so, you avoid having ‘all your eggs in one basket’, thereby not depending too much on a single investment and reducing the impact of any single investment on your portfolio's overall performance, which could lead to higher returns.
How diversification benefits you
- Reduces risk: By spreading your investments, if one performs poorly and another performs well, it could offset the losses so that your entire portfolio doesn’t suffer.
- Higher returns: Investing in a variety of asset classes means you’re more likely to capture the upsides of different markets, benefiting from the potential of those markets.
- Offers stability: When your portfolio doesn’t overly rely on one company or industry, if there is a downturn in a specific asset class, your portfolio can endure the fluctuation.
Note: diversification can reduce risk, but it can’t eliminate risk entirely. It reduces your exposure and the potential impact of risk associated with a specific asset. Market risk always exists.
A crucial strategy for building a strong investment portfolio, weathering the ups and downs of the market over time, and aligning your investments with your values.
Your investment assets perform differently as the economy grows and shrinks, offering the potential for gain or loss. Having a diversified portfolio will help you stabilise the impact of market and performance fluctuations.
Stocks
High potential returns, but volatile in the short term.
Bonds
Stable returns, but sensitive to interest rates.
Funds
Funds hold one or many investments, so can be broad or narrowly diversified.
Real estate
Appreciates over time with potential for income. But can be expensive to maintain.
Cash
Savings accounts grow steadily over time based on interest rates or terms.
Tips for building a diversified portfolio
- Set your investment goals and risk tolerance.
- Allocate assets across different classes.
- Choose investments from various industries and sectors within each class.
- Consider international markets for further diversification.
- Regularly review and rebalance your portfolio to maintain diversification.
Disclaimer: This article is solely intended for information. It does not constitute financial, tax or investment advice or recommendation. Please speak to a financial advisor or registered financial professional before making any financial decision(s).
Standard Bank, its subsidiaries or holding company, or any subsidiary of the holding company and all of its subsidiaries make no warranties or representations (implied or otherwise) as to the accuracy, completeness or fitness for purpose of the information provided in this article or that it is free from errors or omissions.