The economy of any country, including the UK, is subject to unpredictable shifts and changes. Achieving financial success depends to a large extent, on our ability to be able to incorporate these variables in our investment strategy.
Diversification of investments
It’s important to understand that diversification cannot protect your investment from loss but it can reduce the risk involved by spreading it across other investments.
The importance of diversification can be best understood when you don’t diversify an investment. Here’s an example: Suppose you have invested all your money in the agricultural sector. That year, the rains are too heavy and crops fail. The agricultural sector shows a massive reduction in value. Your investment is in danger as you have chosen not to diversify your portfolio.
Diversification of income
Diversification of income helps protect you against the insecurity of job loss and gives you extra income to invest. You feel more self-confident and free from stress when you know you are not dependant on only one source for income.
Earning only one active income is already a risky proposition as you are at the mercy of your job (or boss). If financial success is your ultimate aim, then you must make it a point to diversify your sources of income so that you are able to achieve your financial goals.
Diversification of income involves development of passive income streams that again minimise risk and cushion you against the possibility of being left without financial resources.
Diversification and financial success
Whether it’s diversification of investment or income, the basic aim of the strategy is to reduce financial risk and propel you on the road to financial success. Financial success or wealth creation is dependent on your ability to subject your investment or income to the least risk.
The important thing is regardless of your individual idea of financial success. Diversification is a useful financial strategy that helps you achieve your goal.
The role of diversification in financial success can be encapsulated as follows:
- The process keeps your money relatively safe from market ups and downs
- Since you have taken precautions to develop multiple streams of income and invest in multiple avenues, you can expect to reap the benefits in the form of financial success and enhanced peace of mind.
Every region, industry and sector also undergoes its own changes and each sector may react in a different way to the same event. Diversification helps you use this behaviour to your advantage.