Diversification is one of the corner stones of risk management that is a major part of most successful investment portfolios. Just relying on diversification to manage risk is dangerous and you are gambling with your hard earned assets. Some people suggest you spread your assets over several investing sectors and let the good investments carry the bad ones. For example you have 12 shares – 6 going up and 6 going down. What is the point? Why not keep the ones going up and sell the ones going down? This simple, practical process is easy to do in the share market. You just have to take responsibility for your future wealth.

A diversified portfolio is important. However, it is crucial to manage each share on its own merits using simple money management techniques. This does not have to take much time – some of our clients spend a few minutes per week managing their share portfolio. I think your future financial situation is worth that. Research indicates that the majority of people who fail in investing or trading do so because of mismanagement of losing investments or trades.

If you diversified across these three sectors without managing your trade
you would have sustained heavy losses.

Types of diversification - Diversifying over different investments.
You have a choice of real estate, bonds, cash, shares, derivatives, managed investments, etc.

The extent to which you spread your investments will depend on your capital available. I think that most portfolios should contain some shares as they allow a degree of flexibility.

Diversify over share sectors
It makes sense to hold shares in different industries or sectors to spread your risk (note: don’t rely on this alone). I like to spread my shares over three different market sectors (e.g. bank, retail, oil stocks, etc.). Remember to keep the number of shares in your portfolio at a manageable level.

Diversify over time
When you own shares as a long term investment you can use your research to trade these same shares shorter term once your investment is in profit. You can increase your income from the time you spend analysing these shares by diversifying over different time periods, for example, long term investing and short term trading the same share.

Diversify with derivatives
If your investment shares have warrants, options or futures associated with them then you can trade defensive positions. This will:
1. Increase profit in a good market
2. Protect your capital in a bad market.
(We will cover managing your portfolio by hedging in our upcoming newsletters.)

Managing your portfolio in a professional manner isn't complicated or difficult and is worth the time.