Tweet

DIVERSIFICATION - HOW TO GET THE BENEFITS

Guest post by: Barry Lizmore

Article Overview: Quite simply, it is about not putting all your eggs in one basket. There are many places to invest your money from low return, low risk investments such as cash and fixed interest investments to growth assets such as property and shares, both domestic shares and international.

DIVERSIFICATION - HOW TO GET THE BENEFITS

DIVERSIFICATION

Who can benefit?

Everyone who wishes to maximize or increase the return of an investment portfolio while controlling the amount of risk or volatility. Everyone can benefit, whether invested in retirement funds or outside the retirement system.

What is it?

Quite simply, it is about not putting all your eggs in one basket. There are many places to invest your money from low return, low risk investments such as cash and fixed interest investments to growth assets such as property and shares, both domestic shares and international.

Each of these investments go through cycles, however the cycles do not always coincide. For example, property may be showing strong growth while at the same time domestic shares might be weakening in value. The concept of co-relation is important as it measures how assets classes are related to each other.

Even within each asset class there are benefits in diversifying. If you have a single share the volatility or change in its value, whether short-term (ie daily) or long-term, may be very large. However the greater number of shares you have, especially if they are in different industries, will reduce the overall volatility of your portfolio. If you invest in mutual funds another way to diversify in an asset class is to use fund managers with different investment styles.

What are the benefits?

Most investors want to achieve the highest possible return with the lowest possible risk. Clearly this is hard to do as a higher return equates to higher risk. By risk we mean the volatility of the investment. However by combining different investments it is possible to achieve a higher return with lower risk than by simply investing in the one investment.

This is true whether you are combining different asset classes such as property and shares or increasing the number of investments in an asset class, such as shares in the above example. In fact, with the addition of a moderate amount of growth assets spread across property, domestic and international shares to a portfolio of cash and fixed interest, it is possible to increase the long-term return significantly as compared to a cash and fixed interest only portfolio with taking on only a limited amount of addition risk. That is why many investors invest in a balanced portfolio or a balanced mutual fund.

Any downside?

The only risk-free investments are government backed short-term securities. You must be prepared to accept a modest amount of risk to benefit from diversification. You must also be prepared to accept that one part of a diversified portfolio may show a negative return in the short term although the overall return has been positive.

This is an excerpt from Financial Planning A to Z, to be published in mid 2012. Refer my websitefor more details.

Related Articles
  4.0 Diversification trends in Africa: Economic Report on Africa 2007
  6.5 Financing research to increase TFP: Economic Report on Africa 2007
  5.0 Diversification and Growth: Economic Report on Africa 2007
  5.1 It is not just a matter of policy as institutions matter in diversification efforts: Economic Report on Africa 2007
  4.3 Conclusion: Economic Report on Africa 2007
  5.2 Growth, productivity and diversification: Economic Report on Africa 2007
  5.1 Investment is vital for an economy to diversify: Economic Report on Africa 2007
  Overview IX: Economic Report on Africa 2007
  5.1 Insufficient investments in Africa have hindered the deepening of diversification: Economic Report on Africa 2007
  6.6 Strengthening of institutions: Economic Report on Africa 2007
  6.1 Macroeconomic policies for diversification: Economic Report on Africa 2007
  4.4 References: Economic Report on Africa 2007
  5.1 Determinants of diversification in Africa: Economic Report on Africa 2007
  5.3 Conclusion: Economic Report on Africa 2007
  5.1 The results vary by diversification regime: Economic Report on Africa 2007
  5.1 Fiscal space is critical for diversification: Economic Report on Africa 2007
  6.0 The Way Forward: Economic Report on Africa 2007
  Overview VIII: Economic Report on Africa 2007
  5.1 Faster economic growth could assist in diversification efforts: Economic Report on Africa 2007
  4.2 Diversification regimes in Africa: Economic Report on Africa 2007

Article Tags: diversification, investment return, risk, riskfree, volatility
Referred by: www.robbourne.com.au



Related Forum Posts
Re: Business Women Peer Mentoring Spotlight - Hi Tami, Have you reviewed other comparable sites and coaches? I think that you will find that they have positioned themselves a bit more 'out there', and they dont focus on cheap pricing as the key benefit. I think your copy needs to be much tighter with a focus on the key features and BENEFITS that group coaching provides. Look at The Strategic Coach model etc. Your bio needs to be stronger if you are going to be pitching business development and leadership development. Also, have you put together a strategy for list building and promotions? how many subscribers do you have currently. Local networking as well as grouping some of your existing clients into the first BETA group might help. People dont like 'NEW" services because it comes off that they will be the guinea pigs. Those are my initial thoughts for now. Hope it helps. I'll try and spend some more time reviewing over the weekend and get back to you! Jude


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Resistance to Change and How to Deal With It

9 tips to increase ROI in PPC Campaigns

Ask All to Buy!

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.