Diversification

Investment advisers tend to emphasise the benefits of diversification. Whilst this is not wrong, investors need to take care. Diversification means a portfolio of investments that between them tend to have a low or negative correlation; meaning one investment rising and/or falling has little or no effect on the remaining investments. The need for diversification is felt most keenly during periods of market volatility – but markets then tend to be highly correlated so there may be little diversification to be had spreading the same type of investment across markets. Diversification of instrument can be as important as diversification of market.