Ever heard the saying, ‘don’t put all your eggs in one basket’? This doesn’t just apply to risky career moves or dinner choices (share plates FTW), it also applies to your investment portfolio.

Investing in shares can be a risky business - you’re putting your money on the line, hoping the company performance and share prices are going to do well in the future.

But for most people, they want to limit the risk associated with investing (highly recommended). And the best way to reduce your risk is through diversification.

A diversified portfolio can help you reduce some of that risk by spreading out your investments across different asset classes. Think cash, bonds, shares, property.

If you only want to invest in shares, you can also diversify your shares across different industries and countries.

Diversified shares within a diversified portfolio (now we’re getting real Inception). 

Before we get into exactly how diversification reduces risk, let’s break down how risk works in the investing world.

There’s two types of risks in investing - systematic or market risk and unsystematic, aka specific risk.

Systematic (or market) risk:

Market risk can affect all types of investments and it includes things that are unavoidable and impact entire economies. 

Think of things like pandemics, inflation, and political tension.

Now, market risk is something you’re kinda stuck with no matter what. 

If the entire market crashes like the 2008 Global Financial Crisis, then your entire portfolio will suffer. 

Unsystematic (or specific) risk:

Specific risk is risk that’s unique to an individual company or industry. 

For example, if a company’s CEO gets exposed for something scandalous, that’ll rock the share-price of that company, but not the economy as a whole.

This is the type of risk you can reduce with diversification.

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Why is a diversified portfolio important?

Think of it like this. Thor is pretty freaking great. You'd bet on him beating the odds any day.

But, beating Thanos needed more than just Thor, it needed all the Avengers.

And when one person was down, someone else was carrying the fight, making them strong as a collective.

In the same way, if part of your investment portfolio isn’t doing well, another asset could be making up for it.

Diversification helps you grow your portfolio as a whole while also minimising your risk.

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This is an introduction to our Academy course “Stocks and the City - Investing in Shares”.

If you want to learn more about this, check out the Flux Academy via the Flux App.