Why is Diversification Important?

Published: 30-Apr-2024

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Diversification is a key concept in investing because it helps you to reduce risk and protect your overall portfolio.

• Reduces Impact of Negative Events: Imagine investing all of your savings into one company. If that company goes bankrupt, you lose everything. By diversifying across different companies and asset classes (such as stocks, bonds and real estate), underperformance in one area will not ruin your entire portfolio.
• Different Assets Behave Differently: The main benefit of diversification is that different asset classes tend to move in opposite directions during economic cycles. For example, the value of bonds and infrastructure might rise when equity markets fall which will balance out losses and smooth out the overall volatility of your portfolio.
• Risk-Adjusted Returns: Diversification is more than just limiting losses - it can also help you achieve better risk-adjusted returns. By spreading your investments, you have the potential to earn solid returns without taking on excessive risk.

In short, diversification helps you manage risk and ride out market downturns with the ultimate aim of having a more stable and successful investment experience.

Moneysmart.gov.au: Diversification