importance of diversification

Planning your investments and the Importance of diversification

We are living in a period where people like to come out from the traditional methods of saving and willing to take little bit of risk to increase the earning potential of their investments, a recent study shows that people make investment decision based on what they very frequently see or hear, and influenced by the investment decisions of relatives and neighbours. on contrary, the importance should be given to planning and diversification of your investment portfolio to reach your individual investment goals.

We receive a lot of investment related questions from our readers and most of them are like “tell us what to do”, well, we used to tell them, every one need food, but what they can eat is depends on their taste, health condition and availability of food, the same principle applies when it comes to investment, your choice of investment depends on risk-taking ability, time frame, amount of investment and availability of resources.

Wealth Management

Planning your investments

Saving and investing is two different things and we need to understand it first, though you get little interest for what you save at financial institutions, we cannot consider it as an investment, but, you have to save first to invest it later. An investment should make a profit after preserving the principal or the actual sum invested, and it is subject to risks. To be very honest, even a savings account is subject to risks. We recommend you to read and understand the following article

Investing for the future – Chapter 1 – Understanding Risk and Return

Before making an investment make sure to ask these questions yourself and make decisions according to your answers

  1. Can I afford to lose the capital invested? Up to what percentage?
  2. Will I be able to survive if I lose the money?
  3. Will I be able to survive if there is no return from my investment?
  4. How long I can wait to reap rewards?
  5. Do I have any alternative investment method?

Depends on your answers, you can choose one or combination of investment options available to you

  1. Savings account
  2. Fixed Deposits
  3. Government securities
  4. Mutual funds
  5. Stock market
  6. Real estate
  7. Gold / Gems
  8. Business / Partnerships

Related: Multiple investment options explained

What is an Investment Portfolio?

When you invest your money in different investment options such as stocks, real estate, deposits etc… it’s called an investment portfolio.

Related: A comparison between investment options

Importance of diversification

Have you heard of a good old saying? “don’t put all your eggs in one basket”, this is where choosing a portfolio of investment is important, diversify your total investment capital towards multiple investment options, by doing so, when one investment fails, the other investment safeguard your portfolio return, as returns are uncertain due to market volatility. Diversification helps you to balance your risk and return as well as the liquidity of the investment.

diversification

Diversification is key to reducing risk associated with your investments, even if you choose only to invest in stocks, diversify the capital between a number of stocks. when you choose to invest in property, buy properties in a different location. A healthy investment portfolio should consist of a few low-risk investments, few medium risk investments and few high-risk investments.

Related: Understanding commonly used Financial Jargons

Bottom Line

There are some other elements also to be considered when you plan to invest, such as, short term and long term goal, liquidity and financial literacy, let’s look at those elements on a separate read, once you understand the importance of planning and diversification, all other elements will fall in correct places, now you know the important elements to consider and please feel free to write us for any information and clarifications. Good Luck.


All information including news articles and blogs published on this website are strictly for general information purpose only. advisor.lk will not be held responsible for any loss and/or damage that arises or is incurred by use of such information.

                                                                   

Leave a Reply

Your email address will not be published. Required fields are marked *