Taking the Jargon out of a "Diversified Portfolio"

When you invest in anything you take a risk that it can go down as well as up. One way to manage this risk is to learn about asset allocation and diversification.

Dont worry, I'll try making this more interesting than it sounds!

"Asset Allocation" 

Asset allocation is financial jargon for how to spread your money across different investments. Like the age old saying goes, don’t put all your eggs in one basket.

Another name for the different baskets is asset classes, and broadly speaking there are 4: shares, bonds, property and cash.

To help you decide where to put your eggs you need to ask yourself how much time do you have before you need to use your money, how comfortable you are with risk and how does your current financial situation look. i.e. have you got your emergency pot saved, because if you don’t have 6 months expenses in the bank, do that first before you invest in anything. 

"Diversification" 

Diversification is about putting the right mix of different eggs in each of your baskets.

The key is that you shouldn't invest all your money in one company, one industry, one country, one asset class or one anything.  

2 examples of diversified portfolios

If anything, you want your investments to be negatively correlated, this means that if one of your investments goes down, another is going up.  

Kind of like if you were a shop owner and you sold sunglasses, and umbrellas. When the suns out you sell more sunglasses but if it rains you will sell the umbrellas.

Diversification won’t completely eliminate risk but it’s a smart way to reduce it while building your portfolio , which is just another fancy name for pot of investments.

Thanks for reading,