Importance of portfolio diversification

Portfolio diversification involves investing your funds across a range of assets, to minimise your overall risk. Investors use this approach to mitigate risks and maximize returns. The assets in the portfolio can be spread across different sectors or industries, asset classes and markets. Portfolio managers can help diversify your portfolio in line with an investor’s financial objective and risk profile.

Importance of Diversification

• It minimizes investment risk: The overall risk in a portfolio is a combination of the systematic and unsystematic risk. The systematic risk is one which affects the overall market while the unsystematic risk is one which affects a specific investment or industry. Diversification helps mitigate the unsystematic risk in a portfolio. When you have a diversified portfolio, the downturn of an asset does not have a great impact on your portfolio as the other investment can help offset the loss.
• It helps preserve capital: Through portfolio diversification, you minimize your risk. This helps you reduce the volatility[1] of your investment and preserve your capital.
• It helps leverage growth opportunities:  A diversified portfolio plan helps expose you to different assets in different sectors. When you invest across, you can leverage the growth opportunity present in the various assets and sectors and take advantage of the market movement.
• It reduces the time spent on monitoring your investment: A diversified portfolio is usually more stable as the various assets have different volatility (i.e., when assets react differently to market risks). Simply put, a reduction in return of an asset class may be different from other assets carrying correlation. This stability gives the portfolio the best risk-adjusted return and less time to worry about the portfolio.

Portfolio diversification is an investment strategy that needs to be executed carefully and this requires adequate research. Having a skilled portfolio manager diversify your portfolio is advisable. You can speak to one of our portfolio managers today by sending an email to clientservices@axamansard.com