Like life, placing all your eggs in one basket increases the risk of something going wrong. The obvious solution is to invest in low risk products. But, if you want to earn more than just interest on a savings account, diversifying, or spreading your investment, enables you the play the investment market a little bit safer.
It is a question of balance
This strategy is far less risky than focusing on one company, whose share price will rise and fall in line with their fortunes.
For instance, you buy shares in an ice cream company. A heat wave will usually deliver bumper sales. But what if it rains all summer? Splitting your investment with an umbrella company means if one does badly, in theory the other should counteract potential losses. Diversifying is often a good way to get a foothold on the stock market.
To make this form of investment easier, you can select a fund. Managing ‘collective investments’, where your money is pooled together with thousands of other investors, each fund manager will buy a collection of stocks and shares, fixed securities, perhaps some commercial property and make cash investments. Unit trusts and Open Ended Investment Companies are typical examples. There are over 2,000 funds to choose from, divided into different types or sectors.
Safety in numbers
By smoothing the returns, funds are generally a far safer investment compared to buying individual company shares. Of course the potential for gain is reduced, but hopefully not as much as the potential for loss.
If you’re considering making a pooled investment, talk to us first. We can save you time researching the products and sectors and quickly identify the right fund that meets your investment criteria.