The old truism “don’t put all your eggs in one basket” is a key tenet of investment. All investment involves some degree of risk, so if one of your interests fails it is good to have other, unconnected interests to keep your portfolio afloat.
Even small portfolios can potentially be diversified. However, if you are relatively new to investing or have simply found diversity is something you have struggled with, a few tips and considerations can help you spread your interests and build a nice, diverse selection of investments.
Start with Cash
Remember that cash is also a form of investment. Indeed it is a very important form of investment. It is inherently the most liquid, and is certainly the safest and most stable. Obviously you will need at least some cash for spending, but it is definitely worth having a chunk of your portfolio in cash savings accounts beyond what you would need for meeting your financial needs. Think about how much you want to keep in cash first, and then subtract that from your portfolio before you start looking at other options.
Bonds: A Rule of Thumb
There are few if any hard-and-fast rules when it comes to investing, but there are a few rules of thumb. One rule of thumb which is often recommended relates to how much you’re your portfolio you should put into bonds. The concept is simple; as a minimum, put a percentage of your portfolio equal to your age minus 5 into bonds. As bonds are among the safer and more stable investments, this decreases your risk profile as you get older and are less likely to be comfortable with risking your life savings.
Diversity over Quantity
Diversity and quantity are two very different things. One could have many, many different investments and still not have a very diverse portfolio. The point of diversity is to provide you with security if one asset fails by ensuring you own different assets that are not failing. If you have many different investments but all are fairly similar, then this is not very diverse and it is more likely that all your assets will fall at the same time. For instance, if you have shares in companies across a range of sectors and have provided peer-to-peer loans to businesses, then all your interests are in businesses. Harsh trading conditions and a falling stock market are likely to impact on every one of your investments. On the other hand, if you have a mixture of shares, bonds and property – which bear little relation to one another – it is a lot less likely that any one market factor will impact all of these things equally.