Simple investment rule number 4: diversify

Investing in stocks and bonds comes with risk. It’s good to have a diversified portfolio which is the same as saying ‘don’t put all your eggs in one basket’.

06/08/2020

Transcript

The fourth rule of investing: diversifying

Investing in stocks and bonds comes with risk. It’s good to have a diversified portfolio which is the same as saying don’t put all your eggs in one basket.

What if you put all your money into blockbusters?

In rule 2 we explained why stock picking never works and why funds do. Smart investors spread the risk by buying funds that give exposure to different markets and asset classes if you spread your investments across lots of different industries such as pharmaceutical industrial, internet, green energy etc across lots of different countries. It will protect you against any ups and downs in any part of your portfolio.

We human beings prefer to invest in what we know and trust, but rather than investing in a bunch of UK equity funds which will be invested in the same underlying investments, you can diversify with investments in UK, Europe, US and Asia Pacific equity funds. For example, spreading the risk and taking advantage of different economic factors in each of those markets you should also diversify with cash bonds and mixed asset funds.

Rule Number 4: Diversify your investments with cash, bond and mixed asset funds.

Watch the next simple investment rule here.

Article is accurate at date of writing.