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Financial planning tips: How to reduce your risk with diversification

by , 06 November 2014

Once you start giving your financial planning some serious thought and putting your money to work, you also need to ensure you're not taking on too much risk with any of your decisions.

Taking on high levels of risk may hold the lure of high returns, but there's also a higher chance that you'll lose money.

So how can you reduce your risk?

Let's take a closer look…

How to get the best performance from your investments

Once you’ve drawn up your financial planning goals, you’ll no doubt be looking for capital growth and an income later down the line.

It’s important not to take on high levels of risk to achieve your targets. But the good news is there are some things you can do to reduce your risk.

There’s no guarantees that one investment will pay off, so you should ensure that if it doesn’t, you don’t have anything to show for it.

This is where diversification comes in

Diversification is simply not putting all your eggs in one basket. In other words, not putting all your money into one investment.

If you diversify your investments, if one of your investments doesn’t work out, you shouldn’t suffer too much financially as a result.

Diversifying your investments means holding a wide spread of investments in your portfolio. The key to doing this is how you spread your investments.

Tips to diversifying your investments

Tip #1:
Be wary about investing in the industry or company you work for. You already get your income from this. If the industry turns down and you lose your job, your investment in the industry will also suffer.

Tip #2:
Diversify across different sectors and location. If you contribute to a pension fund, this should be diversified, but it may just be in South Africa. You could consider investing overseas.

Tip #3:
Too much diversification is also a bad thing. This can actually dilute your overall gains. An easy way to gain good diversification is to invest in different exchange traded funds (ETFs) or unit trusts that concentrate on different sectors.

So there you have it, how to reduce your risk with diversification.

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Financial planning tips: How to reduce your risk with diversification
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