The Motley Fool

How Diversification Can Help Protect Investors

The stock markets have been on a rollercoaster ride for the last couple of months. In Hong Kong, the Hang Seng Index has seen quite a bit of volatility this year, mainly on trade war worries and the ongoing protests. However, no one knows when any of these events will resolve themselves or how the markets will react.

In this article, I am going to discuss how diversification is one strategy that investors could use to possibly insulate their portfolios.

Diversification

Diversification is a simple and efficient way to protect your portfolio during a market downturn and from increased volatility. What is diversification?

Simply put, diversification is a method in which money is spread across a wide range of investments. This can help to remove an over-reliance on the performance of one asset to drive the majority of the returns on a portfolio. Also, in a diversified portfolio no matter how the economy is doing at least some of the investments should be thriving.

In addition, if a single investment doesn’t do well it won’t pull down your entire portfolio, which is concentration risk. Rather the other investments can help to pick up the slack and bolster returns, while the company in question is sorting itself out. So, diversification is essential for any investor.

Foolish summary

With so much volatility in the markets over the past year, thinking about portfolio protection is an important step. Investors should thus spend some time thinking about it, allowing them to identify what works for them and frame it in terms of their individual investment goals because every investor will have different priorities.

Stay tuned for my next article in which I’ll touch on three diversification options available to all investors.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.