InvestRight

What is a diversified portfolio?

A diversified portfolio means holding different types of investments so that if there is a downturn in some investment categories, you have other ones that can help cushion the impact.

Some products can be higher risk than others – some are affected by interest rates, others by commodity prices, consumer confidence, management decisions (see Risk), or a host of other factors. By combining several different investments in your portfolio, you can generally reduce the level of expected risk.

Diversification simply means not putting all of your eggs in one basket.  

Choose the right asset mix

One of the first things you and your advisor should decide on is the asset mix of your portfolio. The three basic categories of investment products or assets are: equity investments (shares), fixed income investments (bonds), and cash or cash equivalents.

The asset mix that you choose is important to the overall risk and expected returns of your portfolio. Allocating money among these three asset types is another way to diversify and ensure that you are getting the best return for the level of risk you are taking. It is generally agreed that the overall asset mix in a portfolio has the biggest impact on long-term results.