At its very basic, portfolio diversification is a strategy for managing risk by investing in different types of assets. The result is the spreading and reduction of risk across your portfolio. Thus, portfolio diversification is mainly a risk management strategy. It helps to reduce a portfolio’s volatility since not all stocks, industries, and assets respond the same way. The trick is to get hold of assets with zero correlation to try and eliminate specific risk.
The simple act of investing in different companies and industries greatly reduces the risk that is specific to a certain company or industry. In the end, the overall volatility of the portfolio is diminished since different assets are known to rise and fall at varied times. This goes a long way to smooth out the entire portfolio’s returns.
In the face of the inheritance tax increase in the UK, portfolio diversification is a must. Think about it. Why should you stick with a piece of property that is going to attract hundreds of thousands of pounds in tax? It is important to spread your risk by investing in different types of assets both inside the UK and outside. You can talk to a trusted financial adviser to help you make the right decision.