One of the most effective ways to manage
investment risk is to spread your money across
a range of assets that, historically, have tended to
perform differently in the same circumstances.
This is called ‘diversification’ – reducing the risk of
your portfolio by choosing a mix of investments.
In the most general sense, there are many
adages: ‘Don’t put all of your eggs in one basket’,
‘Buy low, sell high’, and ‘Bears and bulls make
money, but pigs get slaughtered’. While that
sentiment certainly captures the essence of the
issue, it provides little guidance on the practical
implications of the role that diversification plays
in a portfolio. And, ultimately, there is no such
thing as a ‘one size fits all’ approach.