I spoke on Your Money’s Investing 101 segment this week with the ASX’s Rory Cunningham to share my top 5 tips on why you should diversify your investment portfolio. Here they are:
1. Diversification gives you a smoother ride
Diversification is about spreading your money across different investments to enjoy a smoother ride. It serves as a cushion to protect your basket when a few eggs crack.
Diversification is important for anyone who doesn’t want to experience stomach churning ups and downs in their portfolio which is what happens when you only own a few shares.
The theory on how to use diversification was pioneered by Harry Markwitz in his paper “Portfolio Selection” published in 1952.
He showed that by owning shares in different industries and countries as well as other asset classes like bonds, you could get a smoother portfolio return without sacrificing return. Markowitz later won the 1990 Nobel Prize in Economics for his work.