If you’ve had any kind of experience in the world of investing, you would have almost certainly come across the term diversification. You have to diversify your portfolio, everyone says. And there’s certainly some truth to that. However, diversification doesn’t always have to mean what everyone thinks it means, and even what everyone thinks it means isn’t always quite right. Let’s take a closer look.
In fact, portfolio diversification is a relatively simple concept, isn’t it. The idea is to not put all your eggs in one basket. That way, if some eggs get ruined, the others don’t, right? Simple enough. But how that concept has been implemented in practice has been subject to both trends and personal preference.
From the simple to the complex
If you think about it, perhaps the simplest form of diversification is making more than one investment. Even if you think something is a sure thing, nothing is a sure thing. So, in its most basic construct, diversifying means doing more than one thing when it comes to investing.
Over the years, the trends in portfolio diversification have certainly changed. Investing in one form of investment type has been a typical example, such as investing in bonds as well as stocks. Or, if you invest in stocks, don’t just invest in tech companies. Try investing in, say, the energy sector. That way, a negative sector trend in one won’t affect that other, right?
However, since the world of investing has changed in so many ways in recent years, so, too, has what constitutes as diversification. Indeed, an investor can diversify based on any number of factors. You can diversify based on region, or even investment philosophy.
Choose your diversification
In fact, let’s take a quick look at both forms of diversification and how you can use them to diversify even further. For example, let’s say you’re in the practice of diversifying based on region, which makes sense. Different global factors impact regional investments in different ways.
But, you can diversify even further by deciding to also change your investment philosophy, too. So, let’s say that you generally like to invest in good companies, much as Warren Buffet has over his long and notable investment career. Why not change it up and start investing with short-term capital growth in mind?
Indeed, the choices are almost limitless when it comes to the types of diversification strategies you use to ensure the achievement of your investment objectives over the long term.
ASCEND GRP is an asset-management firm, with offices in Toronto, Richmond Hill, and New York, that services clients seeking investment opportunities worldwide.