Diversification

Diversification is the allocation of existing funds to a wide variety of assets with the aim to limit the exposure to the risk of any particular security. Various assets such as shares or interest rate securities behave differently under certain economic environments. 

Some investment products are cyclical, meaning they do well when the overall economy is booming, while others are anti-cyclical, usually benefiting when the economy slows. By diversifying you can potentially increase returns (capital and income) while reducing then overall risk of your portfolio.

There are different levels of diversifying your portfolio, depending on your investment style.

A top level approach is generally called “asset allocation”. The aim is to allocate available funds to various asset classes such as cash, fixed income, shares, property, etc. The next level of diversification is called “group allocation”, i.e. dividing each asset class into groups, for example shares into domestic - international, large cap - small cap, special sectors or others. The last step in the process is the "security selection", choosing each individual security out of a group of securities.

Many investment products enable you to diversify without needing to select each individual security. Some products, such as warrants over a basket of shares, for example, can offer you exposure to certain sectors, like resources or banks, or a selection of shares based on other criteria. Instalments and endowments issued over individual shares or basket of shares offer the benefits diversification and leverage.

Other structured products can offer you diversification benefits plus a capital guarantee.