DiversificationTo protect yourself from downturns in the market, it’s important to invest in a mix of uncorrelated assets. For example, investing in a gold mining company, a jewellery company, and physical gold, concentrates your risk exposure to one commodity. A downturn in the gold market could wipe out the bulk of your portfolio.
As such, it’s crucial to invest in a range of different, unrelated companies, as well as in a mix of different assets. Unlike funds that focus only on equities or bonds, balanced funds mitigate risk by diversifying your investments in two ways:
- Across many different companies, &
- In both equities as well as bonds.
Should a downturn occur in one industry, you can rest easy knowing that you're also invested in other, unrelated companies..
Likewise, the bond market often has an inverse relationship to the equities market. If the stocks are not doing well in the balanced fund, the bond holdings could compensate for it, and vice versa.
