In January 2023, 8-time gold medalist and the world record-holder, Usian Bolt, lost $12.7 million overnight when the Jamaican investment bank, Stocks and Securities Limited (SSL) collapsed. Without getting into the details of this specific case, Bolt’s situation reveals the risk associated with having ‘all your eggs in one basket’ and a classic example of why diversification is crucial to financial security.
If you’re wondering what diversification is, you’re in luck. Below we’ve provided an outline of what diversification is, why it’s important and how to achieve it.
Diversification Defined
Diversification in the financial sector refers to spreading investments across different asset classes, sectors, and geographical regions to minimise risk and maximise returns. Primarily adopted from a risk-management based perspective, this strategy helps improve financial security by distributing assets such as shares, property, bonds and cash savings between various entities.
Benefits of Diversification
In the face of market volatility, diversification is one of your most effective defences. If one investment performs poorly, multiple other assets remain protected. Additionally, by diversifying assets, the high and low performing investments often balance out, leaving you with a well-rounded and stable portfolio.
How to Diversify
The first step to diversify your portfolio is to identify all existing assets and the class they belong to. This could include property, shares, income, super or cash savings and the number of assets you have per class. By understanding what your existing assets are, you can then identify what your next best investment is.
For example, if you have multiple properties, investing in another might not provide you with as much stability as investing in shares. If the property market plummets, having shares for example, might help counter the fall and level out your portfolio.
Diversifying Within Class Assets
As well as diversifying the type of assets you obtain, you can also diversify your portfolio by investing with multiple fund managers or product issuers. For example, investing in shares across industries such as healthcare, technology and retail is more robust than hedging all your bets on one.
Applying Diversification
While diversification is a highly useful and effective strategy, it is also a highly technical process that is affected by market conditions and environmental factors that necessitate continuous adjustments.
If you need support to diversity your current portfolio or better understand what your next best steps are to achieve a well-rounded portfolio, speak with our financial advisors today at info@locumsgroup.com.au
