Investment diversification is very important for those who are unable to constantly manage their investments – guest post by Harry Turner

Managing your portfolio can be time-consuming as you will have to adjust the budgets for each investment. Diversifying your portfolio requires little management although sometimes you will be required to invest more money into different stocks. 

What Is Investment Diversification?  

Diversifying your investments is when you spread your investment across a variety of asset classes, industries and geographical regions. This is to reduce the risk of you losing your investment. The more diversified your portfolio is the better, according to some investors. The reason is simple. If one of your stocks is having a bad period, the other stocks should counteract it; however, that isn’t always the case. 


Investment diversification doesn’t stop you from losing money. It only reduces the amount of money that is lost with your investment. Ideally, the perfect diversified investment portfolio consists of assets that are not highly related to one another.  

How To Diversify Your Investment 

Thanks to how easy it is to invest in stocks using your mobile phone, it can be easy to diversify your investment portfolio, no matter what stock exchange you use to trade. Let’s look at how you can diversify your portfolio so your investment is more secure.  

Start By Diversifying In Different Sectors and Industries 

Diversifying in a sector is still risky because a full sector can be affected by the market. Nevertheless, there are different ways you can diversify in a sector. For example, if you are investing in electric cars, you may want to invest in companies that provide batteries for these cars to help diversify that portfolio. If you are investing in airline companies such as RyanAir or EasyJet, consider investing in the companies that manufacture planes for these companies. Investing in more companies within the same sector is a great way to diversify your portfolio.  


Diversifying even further than this is recommended because a full sector can be affected in some cases. Consider investing in other industries to add more security to your investment portfolio. A good example would be during COVID-19. Many airline companies dropped in value as no public flights occurred to different countries. However, e-commerce companies thrived during this period because more people shop online.  


Consider Diversification Across a Variation of Companies 

This is the simplest form of investment diversification. Many investors commit to investing in just one company in a sector. Although that company may be successful, it can still have bad periods. Apple, for example, is considered a tech giant, so many people invest in this company. However, investing all your money in this stock may not be wise. That is why you should invest in other top-performing tech companies such as Google, Microsoft, Amazon and Nvidia. 


Don’t get emotionally invested in one stock. Be more open-minded about other companies in the same industry. Look at the competitors of the stock you originally bought and see if they perform better.  

Diversify With Asset Classes 

If you wish to take your investment diversification to the next level, consider investing with other asset classes. An assist class is a group of financial securities. For example, investing in raw materials such as gold, silver and copper will belong to the same asset class. However, it could mean investing in other financial instruments, bonds and the stock market.  


With technology making it easier to invest, more asset classes are becoming available to invest in. For example, people are investing in cryptocurrency, commodities, precious metals, and real estate to diversify their portfolios even further.  

Consider Diversifying Across Different Borders 

Diversifying with companies from different countries is also very effective. Geopolitical and international risks will have major impacts on the rest of the world. However, there are many countries that operate very differently from other nations.  


A great example is Japanese stock investments. Earlier in the year, they claimed they were going into a recession, and this caused a number of stocks to decrease in valuation because investors were cashing out on their investments. That is why having other investments in different countries can offer more security to your investment.  

Diversify Across Time Frames 

Time frames are another great way to diversify your portfolio although this can be more complicated. Some stocks are better for long-term goals and other stocks are better for short-term.  


Going back to the airline industry, it may take years for a company to manufacture planes for a company therefore, their gradual growth may take longer than an e-commerce company such as Amazon.  

What Do Investors Think of Investment Diversification?  

Warren Buffet, arguably the most successful investor of all time, is someone who has made it clear he doesn’t agree with investment diversification. He agrees that it reduces risk, but it can also reduce growth and returns.  


Warren Buffet believes that following how companies and industries react to trends in the market is much more beneficial than passively investing across different sectors and companies. Therefore, adjusting your investment due to what is happening in the market is much better.  


Investment diversification can also limit an investor’s knowledge of the market. Those who know a particular market should aim to invest in the market as they can recognise the best opportunities compared to over-diversification of their investment portfolio.  


Over-diversifying an investment portfolio can lead the investor to require a third-party advisor to control their portfolio. The issue with this is that the investor is unaware of the stocks that are in the investment portfolio.  


Although there are numerous benefits to investment diversification, there are some issues with it. It is important that you invest with different stock exchanges to ensure you don’t lose all your investments. Furthermore, you should ensure these are regulated brokers as many stock investment crypto scams. Invest with regulated brokers and diversify your portfolio with different assets then you can improve the security of your portfolio.  
Harry graduated with a journalism degree in 2020 and has always had a passion for writing; in the last 14 months, he reignited his passion for investing. DIY Investor would like to welcome him as our newest contributor and we look forward to publishing some more great pieces from him.

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