Why Every Investor Needs to Diversify Their Investment

Why Every Investor Needs to Diversify Their Investment

Markets can be volatile and unpredictable; this can make investing a bit tricky especially for a first-timer. Many factors can affect an investor’s capital and returns, such as inflation. In January 2020, according to the recent inflation report from the National Bureau of Statistics, headline inflation in Nigeria grew to 12.13% year on year from 11.98% in December 2019.

Diversification helps reduce risk by allocating investments among various financial instruments, markets and other categories. It aims to maximize returns by investing in different instruments and sectors that would each react differently to the same event.

When diversifying your investments, it is important to look for investment opportunities in different instruments, industries and currencies. For example, a weakening in the exchange rate of the Naira can be countered by an investment in dollar-denominated instruments, so investing in funds such as the First Ally Asset Management Dollar Fund may minimize and offset the risks of investing in the local currency.

Diversification ensures that by not “putting all your eggs in one basket,” you will not be creating an unwanted risk to your capital by being too heavily weighted in one specific sector or market.

Some benefits of diversification to an investor include:

Minimizing risk of loss – if one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio.

Preserving your capital – for investors who are close to retirement or have goals oriented towards preservation of capital, diversification can help protect your savings.

Generating returns – sometimes investments don’t always perform as expected, by diversifying you’re not merely relying upon one source for income.

In conclusion, although it does not guarantee against loss, diversification is an important component if you want to reach your long-range financial goals because it helps minimize risk.