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Diversify to Lower Your Risk

Investment risk can be reduced through diversification. You can diversify by investing in different types of investments, across different geographies (countries) and over different points in time. Diversification can also, to some degree, reduce the overall risk of investing in higher return investments.

Risk can be reduced by spreading the investment over different types of investments that respond differently to different events.  For example, when interest rates rise, bond values tend to go down.  When there is a bull market (people with greed charging forward with investing) equity mutual funds rise while bond mutual funds go down.  When there is a bear market (people with fear retreating with investing) speculative stocks will fall further than dividend utility stocks.  You may choose, for example, to target having 25% in the safety of interest, 25% in bond mutual funds, 40% in dividend stocks and 10% in growth stocks.

Risk can be reduced by investing across different geographies.  That is because the markets around the world do not move up or down together. As an example a Canadian may invest 50% in Canada, 35% in US and 15% in International.  An American may invest 70% in US and 30% in International.

Risk can also be reduced by spreading your investment and withdrawals over different points in time, perhaps 2 or 3 times per year if you are doing it manually.  Or set up an automatic monthly purchase or withdrawal plan.

Whatever types of investments you choose, diversify as much as you can while keeping your portfolio of investments as simple and manageable as possible.