Why diversification is one of investing’s most important concepts
If you’ve spent any time learning about investing, you’ve probably heard the saying:
“Don’t put all your eggs in one basket.”
In investing, that’s the idea behind diversification.
It’s one of the most widely recognised ways investors can help manage investment risk over the long term.
What is diversification?
Diversification means spreading your investments across different assets rather than relying on a single investment.
Instead of investing in just one company or one industry, a diversified portfolio may include investments across different sectors, countries and asset classes.
Why does diversification matter?
Different investments rarely perform the same way at the same time.
When one part of a portfolio is performing well, another may be experiencing weaker performance.
By spreading investments across different areas, diversification can help reduce the impact that any one investment has on your overall portfolio.
There are different ways to diversify
Investors may diversify across:
- Industries
- Countries and regions
- Asset classes, such as shares and fixed income
- Investment styles
- Individual companies
Exactly how a portfolio is diversified will depend on the investor’s goals, investment timeframe and risk tolerance.
What diversification doesn’t do
Diversification is an important concept, but it’s equally important to understand its limits.
Diversification cannot:
- Guarantee positive returns
- Eliminate investment risk
- Prevent losses during market downturns
Investment values can still rise and fall, even in a diversified portfolio.
Diversification in practice
Many diversified portfolios combine a range of investments to provide broad market exposure.
For example, diversified portfolios may include investments across Australian and international shares, different industries and, depending on the investment strategy, other asset classes.
This approach helps spread investment exposure rather than relying on the performance of a single investment.
A long-term approach
Diversification is designed to help manage investment risk, not remove it.
Combined with regular investing and a long-term mindset, it can form part of an investing approach that aligns with an investor’s goals and risk tolerance.
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Important Information
This blog has been issued by Instreet Investment Limited (ACN 128 813 016 AFSL 434776) as Responsible Entity of the Raiz Invest Australia Fund (ARSN 607 533 022) and has been prepared without taking into account your objectives, financial situation or needs. Before acting on such information, you should conduct your own review or consult a financial advisor before making a decision to invest. Please read the relevant Product Disclosure Statement and any associated reference documents before making an investment decision. In accordance with the Design and Distributions Obligations, we maintain Target Market Determinations for our Funds. All documents can be found on the Raiz website www.raizinvest.com.au, or calling the Customer Support team on 1300 754 748. Please note that past performance is not a reliable indicator or guarantee of future performance. Historical returns, forecasts, and market commentary are provided for general informational purposes only. All investment carries risk and may result in loss of capital.
