This is a good question.
Diversify can have a lot of different meanings and so before we answer the question it is important to look at what it could mean.
Are we looking at different risk factors or different investments or different investment industries? For the benefit of this post, I am working on the assuming it will be different investments as I dont think it is good for anyone to be 100% invested in one stock, share or bond. Even gold which is generally quite stable over a prolonged period has its ups and downs.
But before we can answer the question we need to look at a number of different things.
Your risk appetite
Every investment comes with an element of risk. Even just holding your investment as cash in a savings account comes with its own risks. The interest rate payable could be lower than the rate of inflation for example. That can mean you are indirectly losing money!
However every investment has a different type of risk.
Government bonds are generally seen as a safe risk (although in recent years who knows!). They tend to offer a small steady return. This is good in one sense as it is generally quite safe. But it will never make you rich and as with cash, if inflation goes up your rate of return could ultimately be negative at times.
There are investments that may get you a little closer to rich. Bitcoin as a prime example, there are people who have got rich off that. But the rate of return now is much slower and so the risk/reward return will be much lower than it once was. With the riskier investments which can sway highly and quickly up or down, they could well help you to become richer. But it is also more feasible those investments could lose money quickly.
Part of our advice process is to understand where your risk appetite is and that is something a financial advisor will run through with you. There will be a variety of questions and some discussion to understand where you fall and where you would like your investments to be placed.
Your age
This is another big factor when looking to determine how your investment portfolio is set up.
There is a general understanding that the younger you are, the more risk you can (but do not have to) take. If your risks do go wrong, you have more time to recover. But that does not mean every 20 year old can throw everything on black and every 60 year old should be invested solely in bonds.
Again, this forms part of the discussion. How old are you, what do you want your investments for, when do you expect to start drawing down on it etc. This ties in nicely with…
Your investment spread
It is not uncommon to have a mixture of high risk and low risk investments in your portfolio. The low risk will usually ensure you do not lose everything if things do go bad, but also that part of your investment will usually rise in line with inflation to ensure your money does not lose value over time.
The rest of it will be put into investments that will hopefully bring some additional returns and/or grow over time.
Going back to your age, you may wish to draw down on certain parts of your investment at different times – you may wish to retire a few years early for example. So we can look at putting a pot together which can be quite safe and “boring” so it is there in the next few years. The rest can be given a little more excitement as there is no short term need for it.
Should you diversify?
Its more or less a given your investment portfolio will be diversified. But how diverse and where will come down to your circumstances and preferences.
And this is where a financial adviser can help. If you are not sure on your risk appetite, we can ask questions to help narrow it down a little. We will take into account what you are hoping to achieve, what your budget is, how long we have to see the returns and come up with a plan.
But just as important, we can review this with you every year to ensure it is performing, your risk appetite changes and re-align your investments accordingly.