What is diversification?

Diversification is ensuring that your investments are not concentrated in a single area but are spread out over a broad variety of different asset classes. This video explains why it’s important not to put all your eggs in one basket.” 

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Video transcript

Diversification takes the luck (both bad and good) out of the investment equation and allows you to focus on what you can control to achieve your financial objectives.

We’ve all heard the saying, Don’t put all of your eggs in one basket.” With investing, the same principles apply.

When choosing an investment plan that’s right for you, your advisor will work with you to determine different factors that will affect:

  • What you invest in
  • How long you want to invest the money for
  • How much risk you are willing to take on
  • How much money you want to invest

Once these are determined, they will set up a diversified portfolio.

What makes a well-diversified portfolio?

A well-diversified portfolio is one that has enough variety to ensure that you are protected from any extreme downward movements in the market. If you drop one egg, you will be okay. Diversification isn’t just about buying as many different investments as possible. It’s about reducing the fluctuation in the value and thereby helping you stay invested for the longer term.

Investment diversification example

Suppose you put all of your money in an umbrella company. Next year, it is completely sunny and there is no rain. Everyone is happy except for you. Since no umbrellas were sold, the value of your investment has decreased significantly.

Suppose you were smart and you diversified. You invested some of your money in the umbrella company, but you also invested in a sunscreen company. Because there was no rain this year, everyone was at the beach every day, and the sunscreen company did extremely well. Your sunscreen investment goes up. The decrease in your umbrella investment is levelled out by the increase in your sunscreen investment.

How can my advisor help me diversify?

Advisors will diversify amongst different types of investments, industries, companies and countries to protect your baskets from rainy days — or not-so-rainy days.