The 4 Key Benefits of Diversifying Your Funds

One of the oldest and most trusted pieces of advice in the world of investing is to refrain from putting all your eggs in one basket. One of the true certainties of the global economy is that it’s unpredictable to a degree. Sure, there are trends and indicators trained account managers follow in order to stay ahead of the curve, but there’s always at least a small amount of risk if you want to see a big pay-off down the road.

What is a Diversified Fund?

A diversified fund contains a range of funds. Let’s say you and your fund manager believed strongly in a particular area – you’ve studied the trends over the short term and the long term and you’re incredibly confident in a future pay-off.

That’s still no guarantee. You can purchase a segregated fund to protect yourself from potential loss (which is still an added cost), every investment you make comes with some degree of risk. It can be a large risk or small, but if we could accurately predict the growth of every portfolio, then this would mean we could see into the future, and the worth of each portfolio would plummet.

So why should you diversify your funds?

1. Diminish Risk

If we can’t see into the future to eliminate risk entirely, then the next best step is to diminish that risk. If your portfolio contains multiple funds from different sectors, then a negative trend in one area won’t affect another area. Sure, it’s painful to watch a specific fund shrink, but it’s a lot more painful when that’s the only fund you possess.

The opposite of diversified funds is focussed funds. When it comes to focussed or concentrated funds, let’s say you’re a strong believer in pharmaceuticals, so you focus your fund to match that belief. You might purchase multiple stocks, but if the entire sector experiences a sharp decline, then the damage to your portfolio will be immense.

2. Improve Chances of Overall Growth

Dealing with the frustration of one declining fund is a lot easier when you’ve got others on the rise or maintaining consistency.

Diversifying your funds doesn’t mean you have to avoid potentially volatile markets either – in fact, it means just the opposite. If you purchase a diverse range of funds, your quantity improves while your quality might not.

Less risk, less reward, right? Buying into several areas increases your opportunity to experience growth somewhere, which will contribute to the growth of your overall portfolio.

3. Global Absolute Return Strategies (GARS)

Think of GARS like the ultimate form of balance. Most investment portfolios only provide financial gain when markets grow, which is easy enough to understand. With global absolute return strategies, however, positive returns are ensured over the longterm even if certain areas experience decline.

How? Through compensation from other funds.

This means that if you’ve diversified your portfolio enough, you’ll experience growth regardless of market conditions. This is true even if it’s simply one growing strategy picking up the slack for a fund in decline.

Absolute return strategies require time to kick in, but they’re a great way to ensure your overall portfolio is hard at work to deliver net positive returns over the long haul.

4. Peace of Mind

What’s your favourite type of flower?

Imagine planting a flower bed with a single type of seed in the early spring, only to discover far too late in the summer that this year’s crop of roses isn’t growing. There isn’t enough time to find a different type of flower, so unfortunately you’re left with nothing.

Diversifying your funds is just like planting a flower garden. The more diverse your selection of seeds is, the more likely you are to experience growth in multiple areas, even if the one area you’re really counting on fails to take root.

So sit back, diversify, and watch your portfolio bloom!

Categorised in: investing

This post was written by Marco Faccone