One of the most important rules of investing is that you have to be diversified. This means not just investing into a single stock or a single property, but instead spreading your money across a range of different asset types and investments.
This is really important for a few reasons. Firstly, it reduces your overall risk. If you invest in just 1 company, you could find that they struggle to grow or they could even go bankrupt. If that was to happen, you run the risk of losing all of your investment.
Instead, if you are invested in 100 stocks, or 1,000 or even more, there is no risk to your overall portfolio if some of those companies don’t do so well.
As well as reducing risk, diversification can also help you achieve better returns in the long term too. One of the important factors for diversification is making sure you have investments that don’t always move in sync.
After all, if all of your 1,000 stocks go down at the same time and by the same amount, it’s not of any benefit over investing into just 1 company. In the real world, different companies from different industries and countries grow and fall at different times and at different rates.
This can help smooth out the ups and downs of your portfolio, and over the long term it can potentially mean you end with a higher rate of return.
For investors that are heavily invested into property, diversification can be difficult. A single investment property can cost hundreds of thousands or even millions of pounds. You aren’t going to be able to diversify into 100 properties, or even 10 unless you have multiple millions to invest.
A portfolio that invests into the financial markets such as the stock and bond market can access a huge amount of diversification for any sum of money. A single investment fund such as an ETF can easily hold over 1,000 different individual investments.
If you’re heavily invested in property, you should seriously consider selling at least some of your holdings and allocating the money to investments that can be more easily diversified.