We are all familiar with the saying ‘don’t put all your eggs in one basket’. This means not to hold too much of the same investment and is called ‘diversification’.

When it comes to any investments i.e. Isa, Pension, Cash, Property, or any other long term investments the simplest and the cost effective way of managing a portfolio is through the use of Unit Trust/OEICs (open ended investment companies) or what can more easily be referred to as investment funds. Funds are a collection of different underlying assets (typically shares or bonds), with the exact make-up decided by a fund manager. In fact a fund will normally invest in between 50-100 separate holding at any one time.

Diversification ensures that even if one company, industry or country takes a hit, your portfolio is balancing those investments with ones outside the affected area.

Within diversification you could hold stocks from a range of market capitalizations, from small to large, as well as from a range of industries including foreign-based companies.

Equally important is to hold both growth and value orientated stocks, government bonds, high quality corporate bonds, high-income equities and absolute return funds. By loading any one sector of the market, it defeats the whole purpose of diversification.

LET US TAKE THIS ONE STEP FURTHER

You have £25,000.00 to invest. If you take the advantage of the full diversification you could spread the investments:

1. Into 10 fully researched funds.
2. Around 20 different categories.
3. Around 20 countries.
4. Approximately 500 individual securities i.e. individual company stocks
5. Around 100 bonds
6. Approximately 10 sectors

The risk can further be minimized by selecting various risk profile i.e. Low Risk, Below Average Risk, Average Risk, Above Average Risk or High Risk.