Why Diversify Your Portfolio?

Diversifying across investments and by asset class is crucial, while by sub-asset is useful but not essential

Holly Cook 18 February, 2013 | 7:00AM

This article is part of Morningstar.co.uk's Equity Investing Week.

Diversification: What It Is

If you're having friends over for a barbecue, would you only serve meat? You'd probably expect more than just protein. Instead, you'd probably offer an assortment—some salad, bread, maybe beer, and so on. In short, you'd diversify your table so that your guests would be satisfied.

Now consider investing. You want to own various types of investments so that your portfolio, as a group of investments, does well. Certain types of investments will do well at certain times while others won't. But if you have enough variety in your portfolio, it is pretty likely you'll always have something that is performing relatively well. Owning various types of funds, instead of or in addition to stocks, can help reduce the volatility of your portfolio over the long term.

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About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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