How can diversification help reduce investment risk?
Different types of investments perform better under different market conditions. By investing in more than one type of investment you diversify, which can help reduce the risk for your overall investment portfolio. The more ways you diversify the more likely you are to reduce your risk. For example, across • Different asset classes (cash, fixed interest, property, shares) • More than one investment in each asset class (eg several different industries and companies when investing in shares) • More than one type of fund and investment manager when investing in managed funds. Let’s say you had all your money in just one investment and that investment didn’t perform – you would make a loss. But, if you spread your money across different types of investments you may have a better chance of including some investments that will perform.
