It would seem common sense not to put all your eggs in one basket but you’d be amazed at how many investors, even professional ones forget just as a healthy diet means eating a range of different foods, a healthy portfolio should include a number of different assets.
The main reason for diversifying is to avoid the risk of being too heavily concentrated in one particular stock sector, country or asset class.
Another reason is to reduce volatility.
Historically equities have produced higher returns than bonds or cash but in the short term share prices can be very volatile.
So holding bonds, and if you’re very cautious, cash in your portfolio alongside equities can smooth the ride to your investment goals.
This video demonstrates how over the long term asset class performance tends to revert. Meaning the whole market removes the need for guesswork, saving you time money and unnecessary anxiety.
So the fourth step to successful investing is to spread your risk.