Get the importance of diversifying

If I was a financial adviser I would drink wine and beer. Blog over.

Ok that’s a bad idea, but in the world of your finances mixing is a good thing.

The most effective methods of making money turn into more money is put it in lots of baskets, not just one. But you heard that before, probably agreed with these sentiments and then moved on with your day. But what does “never put all your eggs in one basket” really mean when it comes to your savings.

Let me explain.

There are 4 main types of money.
1. Cash – the one we all know so well. Bank accounts, credit union etc.
2. Property – bricks and mortar, it can’t go wrong!
3. Bonds – Governments and large companies want to raise money so they issue bonds. Investors buy these bonds and the government in turn will pay them back their money, plus an interest rate yearly.
4. Shares – Companies around the world issue shares on stock markets and their prices tend to fluctuate a lot based on various economic and company factors

Let’s think of the 4 above as your friends or colleagues, they each work in their own very special way:

• Cash is very laid back. Lazy almost. It does very little except sitting in the corner, waiting, earning very, very little. We all know the type.
• Property is your normally reliable, steady Eddie friend. It has an eye for an area it likes. Property will sometimes let you down and when it does it lets you down badly but it’s usually not entirely its own fault! It’s quite inflexible but normally will do what you want it to do if you choose the right one in the right place at the right time!
• Bonds are your rock. They will continue to pay you back long after you invested in them at the agreed rate. Beware though. You made a long term commitment so you have to stick with it if you want all that you gave them back!
• Shares are your wild, excitable, crazy socialite companions when young and enthusiastic. They can often turn into real leaders in time. They are full of ideas, sometimes crazy, sometimes terrible and sometimes brilliant. Stick with these guys for the long term and if you know enough of them the good ones will carry the airy fairy ones along for the ride.

These personality types all react to things in a different way. Often assets react in opposites so when one asset class goes up, another can tend to go down. Knowing this in advance means that we can often protect clients against the big falls that people who invest in the “one basket” approach suffer.

Like any decision in life, how you invest is entirely down to you. And yes, investment can fall as well as rise and you know that the past is no guarantee as to what the future holds but my genuine and honest belief is that there is some good in all of the above.

A broad mix of all of the above allows investors to control their risk while still earning a return. A return that is very unlikely to be earned if you sit in the corner and be lazy, uninterested and withdrawn.

I will never suggest a client uses their emergency savings like this but I will probably suggest that your pension is invested broadly. Your medium and long term money should never sit in the corner lonely!

As always, if you would like me to review your situation I’ll be happy to help. Just get in touch directly on nick.lawlor@newbeginning.ie or call Kathy to arrange a call on 01 5310571.

Chat soon,
Nick

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