10 Advantages of a Diversified Investment Portfolio
A diversified investment portfolio isn’t as exciting as one focused on a specific sector or asset class.
But it has a lot of advantages that can make it a preferred option for investors.
Minimise Risk
A diverse portfolio means that you’re less vulnerable to a significant downward shift in the value of a particular asset or asset class.
It’s in the nature of the economy that different asset classes perform well in different economic environments, and while one thing falls another will rise.
With a diversified portfolio, the rising assets will protect your value from the falling ones. Most importantly, you won’t be vulnerable to a sudden change in one sector.
Protection from Crashes
The ultimate example of these sudden changes is a financial crash.
Nothing can entirely protect you from a massive financial crash like the one of 2008. But a diversified investment portfolio will go a long way.
You won’t be vulnerable to the sector of the economy that suddenly falls, like the subprime mortgage sector did.
And even in a crash, some assets will benefit, helping to minimise your overall losses.
Preserve Capital
For an investor later in their life, who’s more concerned with protecting existing capital than in growing it, a diversified portfolio is the perfect choice.
It won’t make the huge gains of a focused portfolio that gets lucky and sees its sector rise.
But risk minimisation will preserve your capital through tremors in the market.
Generate Returns
If you’re relying on your investments for your income, then diversifying can be a good way of ensuring that you receive the returns you need.
Even when all your investments are growing, some will do so better that others. A diversified investment portfolio will make a stable, steady income more likely.
Lower Maintenance
Managing a focused portfolio is a complex business. There are greater risks and rewards.
To avoid the former and benefit from the latter, you have to be aware of the details of what’s going on in the market and how it will affect your specific asset class. This means more market watching so that you can leap in on short notice to make a critical trade.
Diversified investment portfolios don’t need this level of attention. The balance of assets means that you can focus on long term trends rather than short term actions.
They’re therefore a lower maintenance investment.
A More Accessible Investment
This lower maintenance makes diversified portfolios a more accessible investment.
A casual investor won’t have the specialist knowledge or focus on the markets needed to make a single-class portfolio pay off.
By investing in a diversified portfolio, they can use the balance of assets to secure their finances, instead of having to focus on the detail of the markets.
Nuanced Adjustments
There’s still space for a more experienced investor to play strategically with a diversified portfolio.
Not all diverse portfolios are balanced the same way.
Your mix of investment in stocks, bonds, land, minerals, and other assets can shift over time to maximise your growth and meet your life goals.
This might mean a shift towards bonds as you get older and are more concerned with security over growth.
It might equally mean concentrating part of your portfolio on a particular sector, for example holding a portion of stocks in emerging tech companies for the chance to benefit from innovation.
Correct for Human Bias
As human beings, we like to believe that we have a good grasp on the world around us. We make predictions about what will happen in the future based on this.
The problem is that these predictions are inherently biased.
They are made on the assumption that past trends will continue, but the world often doesn’t work that way.
In a focused portfolio, it’s tempting to invest more in assets that have been doing well up until now, assuming they will continue to do so. But the market proves time and again that that isn’t what happens.
A diversified portfolio corrects against this bias. With a diverse range of investments, you’ll benefit from whichever of them rise, regardless of your expectations.
Winners Don’t Stay Winners
Tied to this is the fact that a winning investment seldom stays a winner.
The leading asset class in one year is never the leader in the next (https://blog.wealthfront.com/the-benefits-of-diversification/).
Investing in one asset class, even a high performing one, means that you’ll miss out when something else comes out on top.
A diversified investment portfolio benefits from them all.
Peace of Mind
All of these benefits contribute to one other important one – peace of mind.
If you have a diversified portfolio, you won’t be ruined by a sudden fall in one sector.
You can sit back and enjoy the benefits of your investments, even as the markets swing.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
