Investing: the power of diversification
Cash, shares, bonds, commodities and property are just some of the assets that investors can choose to put their money into. In fact, a fully diversified investment portfolio should include multiple assets and geographies.
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‘The most powerful tool an investor has working for him or her is diversification. True diversification allows you to build portfolios with higher returns for the same risk. Most investors...are far less diversified than they should be.’ says Jack Meyer of Smart Money.
In the fourth episode of his series, Andrew Craig, author of How to own the world, looks at the importance of diversifying your portfolio and how it can help you manage risk.
Andrew says it should come as no surprise to people that if you are going to take a simpler, more formulaic approach to investing, you will want to ensure that you ‘own the world’ and ‘own inflation.’ What he means by ‘owning the world’ is:
- You should own a wide variety of investment products or assets. In the long run you will want to have cash, shares, bonds, commodities and property, not just one or two of these as many people do
- You should aim to own assets from all over the world, not just one geographical area such as the UK or US
He says one of the biggest mistakes people make with their investments is that they tend to own assets from their own country. This means two things: firstly, when that particular country or geographical area has a difficult time, their investments will struggle. Secondly, they miss out on the potential for explosive growth that comes with owning what some would deem to be more exotic parts of the world.
‘Diversified by asset class’ means that in a year when shares fall off a cliff, as most of them did in 2008, you won’t lose a vast chunk of your money like everyone else. You’ll actually have a good chance of having a positive year (or at least far less negative one than most people) because, even though some of your shares might fall in value, you will own other assets such as commercial property, bonds, gold, silver, oil and other commodities. Many of these will have held up very well in a bad year for shares.