One of the most important principles of investing is to ensure that you have a diversified portfolio. This means ensuring that you spread your capital amongst different investments so that you’re not reliant upon a single investment for all of your returns. The key benefit of diversification is that it helps to minimise risk of capital loss to your investment portfolio.
What are some of the benefits of diversification?
Three key advantages of diversification include:
- Minimising risk of loss – if one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio from concentrating all your capital under one type of investment.
- Preserving capital – not all investors are in the accumulation phase of life; some who are close to retirement have goals oriented towards preservation of capital, and diversification can help protect your savings.
- Generating returns – sometimes investments don’t always perform as expected, by diversifying you’re not merely relying upon one source for income.
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