Portfolio Diversification Simplified
“Minimize expenses and emotions; maximize diversification and discipline.” Allan Roth, Certified Financial Planner, defines investment in these eight simple words. My second blog ever was a little listicle; ‘10 simple tips for a successful investment club’. Simple Tip No.6 was ‘Diversify’.
Portfolio Diversification decreases your risk. Asset allocation is the first pillar of portfolio diversification. It involves considering dividing your investments across the three main asset classes –
- Cash and fixed income – lowest return and lowest risk
- Property – either listed or direct
- Shares – generally the highest risk category of the lot
Deciding on the initial size of your investment stash as well as the balance between these three asset classes demands a long hard look at yourself…
Surprisingly enough, some of the questions you need to ask are intensely personal – what is your appetite for risk, & how well could you sleep at night if you were unable to close a large and risky position in an illiquid market, for example.
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