Photo by Alison Marras on Unsplash

Strong income and robust savings are great, but there is another way to grow your money. It’s called ‘the life changing magic of diversifying your investments’.

Income and savings are great ways of building your wealth, but they’re not the only tools or approaches at your disposal. And, in this day and age, the two alone are unlikely to achieve your life goals and ambitions.

Many of us will have joined the ‘rat race’ by our early 20’s and, as our careers progress and our responsibilities grow, the vision of escaping becomes less and less apparent. There are only so many hours in the day and, while we’re busy climbing the ladder and prioritising precious time with those closest to us, to gain significant financial wealth, we need to find a way to grow our money — and make it work for us. The most accessible way to do this is by growing, or investing, your money — and ‘diversification’ is the smartest approach to take.

So, what do we mean by diversifying investments?

While Investopedia articulates ‘diversification is a risk-management technique that mixes a wide variety of investments within a portfolio’, it can also be happily summed-up by the undying saying, ‘don’t put all your eggs in one basket’. Diversification spreads your money between different kinds of investment products, so you can reap the benefits and reduce the losses of your overall portfolio. Put simply, it manages your risk. The idea is you choose a number of investments, ranging from low to higher risk products.

Sounds brilliant, right? So why haven’t we all jumped on the bandwagon? The simple answer: we don’t all know how to diversify.

How to diversify your assets is best explained using two layers. The first layer is diversification across single types of investments: cash savings, such as savings and current accounts, and ISA’s; fixed interest securities or bonds; property, including your apartment or house; and shares.

The second layer is diversification within each asset. Here’s a quick deep-dive into ‘shares’ — also known as ‘equities’ or ‘a stake’ in a company or companies.

Investing in a single company could be a hazard, but you could spread your investments between low risk to high risk investments, your country of residence and overseas markets, and different sectors.

Take the latter point, for example. If you invested 100 percent of your share capital into purchasing Amazon shares, then your risk is 100 percent. However, if you divided your capital into shares between two firms — Amazon and Netflix — then your specific risk is 50 per cent for each firm. Taking this one steps further, if you invest in five companies — Amazon, Netflix, Fox, BBC and Google — your risk equates to 20 per cent in any one company.

Let’s face it, we are not all risk takers. Diversifying gives the risk adverse among us a level of reassurance because, the more you spread your assets out, the less likely a single event will negatively impact your overall portfolio. This is not a new concept — farmers have diversified their crops for years to protect livelihoods in the event of a drought or other natural disaster. And it’s no different for you.

Diversifying your portfolio will gradually build your wealth over time. This is particularly crucial if you are someone with, another 50 or 60 years of, lifetime achievements to be had.

Diversification is not hard, and you never know, it may just create some life changing magic.