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  • Writer's pictureJoe Woodhouse

What is Diversification?

When you invest in shares you take a risk that the value may 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 is financial jargon for how to spread your money across different investments. Remember the age old saying, "don’t put all your eggs in one basket"? Well, another name for the different baskets is asset classes, and broadly speaking there are two;


- Shares (also know as equity or stocks)


- Bonds (also known as fixed income 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?

How does your current financial situation look?


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 or one anything. 


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 wellies. When the suns out you sell more sunglasses but if it rains you will still be in pocket because you'll sell the wellies.


A great way to diversify is by investing into a multi asset fund, which will give you a range of both big and small companies, based in different countries, in a variety of industries.


Diversification won’t completely eliminate risk but it’s a smart way to reduce it while building your portfolio.


Thanks for reading.


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