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Diversification Lessons on diversification and not putting all your eggs in one basket

Diversification Is Spreading Investment Risk

By Lyn Bell

Diversification is usually explained simply by the saying "Don't put all your eggs in one basket". It has never been considered safe to place all of your funds into one single investment but now, more than ever, a strategy of investing in a single asset is coming home to roost. All too often financial planners and advisers have been perceived as against property investing. Generally this is not really the case. It is just that property should always only form part of your investment portfolio and not 98%, or more, as in many cases.

All too often there is only one property investment in a portfolio and this increases the risks. By spreading your investment across a number of properties you reduce the risk and buy yourself some time if the market starts to collapse or slow. Diversification also means investing in different property classes such as commercial, residential and rural as these generally have their own market cycles. One of the know risks is that property is an illiquid investment -- which means it is hard to sell quickly when times are tough.

Unfortunately investing solely in finance companies has been another strategy for many Kiwis and this has had a disastrous effect for many investors who have not diversified. The collapse of so many New Zealand finance companies is testament to this with many investors hurting. Stories abound of investors placing all of their funds with one company and losing it all.

If you are serious about protecting your investments you would manage your risk by also ensuring diversification across asset classes. This means investing a portion of your total investment in, not only cash assets like term deposits, but also investing a portion in property and shares -- and, yes, even international markets.

As far as investing is concerned, there are no guarantees bar one -- not diversifying will almost certainly hurt you in the long run. It is an important lesson that diversification is the key to any good investment plan.

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