Diversifying Your Investments

By Carol Yip

Diversification is often thought of as the key to smart investing. The simplest way to describe diversification is to use the old saying “don’t put all your eggs in one basket.”

By placing your eggs in different baskets, there is less risk of losing all your eggs if you happen to drop one basket. Diversification happens on a couple of levels.

First is the asset allocation – that’s when you spread your investments across different asset classes such as stocks, bonds and cash equivalents like savings or fixed deposits, and property.

By doing so, your portfolio will not make huge losses even if stock prices happen to fall, because the value of the other assets in the portfolio will either be maintained or may even rise; i.e. property prices may increase while cash kept in fixed deposits will continue to earn interest income.

Second is spreading your investments over various options within a particular asset type or investment products like shares in different industries, property type or in different location or country.

By diversifying, you can balance the risks and returns of the different asset classes and also of the investment within the asset class itself. For example, you invest in a couple of properties in different locations. One piece of property is in a well-sought-after location, so its price will increase much

more than the other property which is in a less popular location.

If you decide to sell both properties at the same time, the higher gain you make from the first property will offset the loss you make on the other property.

You need a smart decision to implement your diversify investment strategy, the decision factors include your level of risk tolerance and your investment horizon – the amount of time you have before you need the money.

Both of these criteria will determine the type of investor you are, and what percentage of your portfolio to assign to each asset type.

Generally, there are three types of investors, although many people do fall in between these types; conservative, moderate and aggressive. Which category of investors do you belong to?

The more aggressive you are as an investor and the longer you can leave your money invested, the more likely you are to consider putting more money into volatile investments like stocks and high growth bonds. On the other hand, if you are more conservative and have a shorter time frame to invest, you might allocate more money into less aggressive investments like fixed deposit account and other cash equivalents.

A moderate investor would usually have a balanced portfolio in both riskier asset classes like shares or equity unit trust funds and in fixed income investments like bonds and fixed deposits.

Remember, no two investors are exactly alike! Don’t try to follow your friends, parents, siblings or relatives unless you are very sure they have investment experience of proven positive results. Only you can decide which options to choose and how much you spread your savings around the different asset types and investment products available.

Photo by rawpixel from Burst

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