Investing

How you can minimise your investment risk through diversification

  • 14.SEP.2018
  • Guest blogger: Alison Banney,  finder.com.au

We’ve all heard the advice “don’t put all your eggs in one basket” at least once or twice before. While it’s a versatile saying that applies to an endless number of situations, the message remains the same. When applied to your investment portfolio, it’s a reminder that diversification is key.

You should have more than one basket

When you think about the saying “don’t put all your eggs in one basket” literally, it sounds like silly advice. After all, if all your eggs were in the one basket they’d be so much easier to carry. But what if something happened to that basket? What if you were carrying it and the handle broke? You’d lose every single one of your eggs. But if your eggs were split between a second or third basket and the handle broke on one, you’d only lose a portion of your eggs.

The same applies to your investments. If you put all of your money in property and there’s a property crash, there goes all your investments. However, if you had half of your money invested in property and half in the share market and the property market crashed, you’d only lose half. And if you’ve got a third invested in property, a third in the share market and a third in cash, you’d lose even less.

Choose baskets of different shapes and sizes

You might be tempted to use only lightweight baskets made of a thin material to carry your eggs. Yes, these baskets are lighter to carry so you’ll get home much faster, which is rewarding, but they also come with more risk of breaking. In other words, they bring more risk for potentially more reward. Instead, make sure some of your baskets are thick and sturdy. They’ll be heavier to carry and might not look as nice, but they’re much safer and far less likely to break.

The same goes for your investments. Your portfolio should have a mix of high-risk baskets like local and international equities, as well as a range of sturdy, low-risk baskets like term deposits and bonds. If your equities basket does break, you’ll be glad to know you’ve got your cash baskets there too.

Don’t always run with your basket, walk sometimes too

If you’re sprinting down the street, jumping over puddles and dodging taxis while trying to carry your basket of eggs, chances are some will fall out and crack. But if you take your time and walk at a slow and steady pace, you’re much less likely to drop any.

It’s fine to have some short-term investments in your portfolio, but it’s important to support these with a range of longer-term investments also. For example, it’s okay to buy shares in some high-growth companies, which you plan to sell after only a few months or even weeks. But make sure you also buy some blue chip shares or invest in an exchange traded fund that you can hold for years and years.

There’s no doubt that the saying “don’t put all your eggs in one basket” is a widely-overused cliché. But it’s a cliché for a reason. If you keep it in mind when you’re constructing your portfolio, you can successfully minimise your investment risk (and at the very least, you’ll get all your eggs home in one piece).

Disclaimer
The information in this article is general in nature. It should not be the sole source of information. It does not take into account the investment objectives or circumstances of any particular investor. You should consider, with or without advice from a professional adviser, whether an investment is appropriate to your circumstances. Australian Corporate Bond Company Limited is the Securities Manager of XTBs and will earn fees in connection with an investment in XTBs.

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