The value of your investments can go down as well as up and you may get back less than was paid in.
What is diversification?
Diversification is a relatively simple idea once you get past all the jargon. It’s an approach to investing that means you choose a mix of different investment types and countries. Put simply, it’s about trying not to put all your eggs in one basket.
Diversifying your investments can help to spread risk and improve your potential for positive returns. It could have a positive impact on the value of your money in the long term, although there's no guarantee this will always happen.
How does diversification work?
Diversification is about spreading investment risk and smoothing returns. Investments are affected in different ways by different factors, such as economics, interest rates, politics, conflicts, even weather events.
Diversifying means you’ll have a mix of investments across different types and geographical locations. So, the value of your investments should be less likely to change significantly than if you were invested in a single type of investment or location.
Ultimately, it means that if one of type of investment doesn’t perform well, another might. This can mean that the value of your money should not move as much if markets go down or up and therefore help to smooth the returns you could get.
How can you diversify?
It's possible to do it yourself and build a diversified portfolio. But this can take a lot of time and work, and you need a lot of knowledge and experience to choose the best mix of investments.
Because of this, many people choose to invest through funds run by professional investment managers. They'll pool your money with that of other investors and then divide it across a range of investments.
You'll benefit from the managers' expertise and their ability to access a wider range of investments than those available to individual investors.
You can choose funds that focus on one particular type of investment or country or, for greater diversification, funds that invest across a range of investments. These are sometimes known as multi-asset funds.
Whichever route you choose, we'd always recommend that you speak to a financial adviser before you make an investment decision.
If you don't already have a financial adviser, and would like to find one, you can get started on our financial advice page. There’s likely to be a cost for financial advice.