When investing for some future goal, one of the most basic investment principles is that of adopting a proper asset allocation strategy. This really is just a fancy way of saying “diversify” or “do not put all your eggs in the one basket”.
The truth is that once people understand the most basic benefits to diversifying their investments, they quickly see just how powerful the practice can be.
The main benefit to diversification is the spreading of risk. By diversifying the portfolio, you are adding more assets to it. That could mean spreading your money across Cash Deposits, Government or Corporate Bonds, Equities, Commodities or Property as an investment.
Regardless of what diversification means, you are essentially spreading the risk among different assets. This means that if for example Equities fall in value, the other assets might be able to retain or improve value overall. Spread of risk, therefore is a fundamental practice that investors can employ to reduce potential losses in their portfolio.
At all times we therefore remain cognisant of the benefits of portfolio diversification, in reducing portfolio volatility and increasing risk-adjusted returns. Within diversification we are trying to balance the correlation between the different types of assets.