Why Diversify?

I hear many conversations around the braai of “the next big thing” just to see it fail shortly after. Many people lose money this way, some lose everything. That’s why diversification might be a critical factor in a successful investment portfolio.

Here are some facts around asset diversity in an investment portfolio:

Risk reduction: By investing in different asset classes, you spread your risk across multiple investments, rather than relying on the performance of a single asset. For example, if your portfolio is heavily weighted in shares and the equity market experiences a downturn, your entire portfolio could be negatively impacted. However, if you also have investments in bonds, listed property, or other assets, the losses in one area may be offset by gains in another.

Increased potential returns: Different asset classes can perform differently in different economic conditions. By diversifying across different asset classes, you have the potential to capture gains from different market conditions. For example, while shares may perform well during periods of economic growth, cash may perform better during periods of economic uncertainty.

Protection against inflation: Inflation can erode the purchasing power of your investments over time. However, certain asset classes, such as shares, have historically provided protection against inflation. By diversifying your portfolio to include these types of assets, you may be able to better protect your investments against inflation.

Personal goals and risk tolerance: Diversification allows you to tailor your portfolio to your personal goals and risk tolerance. If you are approaching retirement and have a lower risk tolerance, you may want to invest more heavily in bonds or other fixed-income securities, while if you are younger and have a higher risk tolerance, you may want to invest more heavily in shares.

Diversifying your investment portfolio can help you manage risk and potentially increase returns over the long term and is an important component of a well-rounded investment strategy.

Ruvan J Grobler RFP™

Photo by Garmin B on Unsplash

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