Investment risks – why diversify your investment portfolio

Sound investments are a balancing act between risk and returns, minimising the risk of capital loss while looking to grow capital or generate an income. Risk is a fundamental part of investment and can dictate how much of a return on any investment you realise, but it can also dictate how much your capital is at risk. Many investors look to avoid unnecessary risk, and one way to do this is to build a diverse investment portfolio.

As part of a comprehensive investment strategy, it’s a good idea to diversify your investment portfolio to protect yourself from unnecessary risk and maximise your returns.

Why invest in property? Read our helpful guide to find out if investing in property is the right choice for you.

What is portfolio diversification?

Diversifying an investment portfolio is a common technique investors use to lower investment risk. This is done by allocating investments across several sectors and industries, making portfolio diversification known as “asset allocation”.

The theory behind diversifying your investment portfolio is to reduce losses by mitigating risks through investing in different areas that may react differently to an overarching event, such as a global financial crisis.

A diverse investment portfolio would have several different assets, such as stocks, shares, cash, property and bonds.

Discover how to inflation-proof your portfolio with property investment.

Why is diversification important when managing risk?

The key benefit of investment portfolio diversification is that it can mitigate investment risk.

A simple way to view portfolio diversification is through the metaphor, “don’t put all your eggs in one basket”. If you lose your basket, you will lose all your eggs too. It’s the same with investments – if you put all your money into one type of investment or invest with one business, for example, and something adverse happens to that industry or the business fails and your investment could be at risk.

Investment risk is always uncertain, and it’s important to get expert advice from an independent financial advisor before making investment decisions.

Investments can be made with a range of risks, from low-risk investments to high-risk.

High-risk investments include investments such as cryptocurrency and some types of stocks, while low-risk investments tend to be government bonds or property.

A tenet of investing is balancing risk and reward – exposing capital to a risk level that generates a positive return.

Everyone’s risk profile is different. An individual’s circumstances and financial resilience can dictate their risk appetite. Independent financial advisors can often conduct a risk profile analysis, identifying an individual’s attitude to risk and helping support more informed investment decisions.

Can you diversify a portfolio too much?

It is possible to over-diversify your investment portfolio, which can carry its own set of impacts.

An overly diverse portfolio can result in higher management costs and lower returns as your investments are too thin to generate significant returns.

Managing an over-diversified portfolio can demand more time, potentially making it more difficult to keep track of different investments and make informed decisions.

How can diversification boost returns?

A central plank when diversifying investments is to protect the investor from losses.

This can be done by using several different investment types and investing in a variety of markets and sectors.

Diversification can increase a portfolio’s risk-adjusted returns, meaning investors may generate greater returns due to the spread of investments, as the entire portfolio generates returns. Poor-performing investments can be offset by out-performing investments in the same portfolio, growing the entire portfolio in aggregate. Risk-adjusted returns are typically used as a measurement of efficiency to discern how well capital is being deployed.

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How property investment is vital for a diverse investment portfolio

Making property investment part of your portfolio can be important in creating a diverse portfolio as, even though the UK housing market fluctuates, overall property is considered a relatively stable investment. The average house price in the UK was £294,000 in December 2022, up £26,000 on the previous year, despite it being a challenging year for the economy.

Property can provide investors with an array of investment opportunities, from property development to build-to-rent to student accommodation, which can generate significant returns.

There are several ways to invest in property, all of which offer investors varying returns depending on market health.

Different forms of property investment

You can invest in several properties, including residential, commercial and industrial. Investing in new build developments and rejuvenating older properties is also possible, providing a range of property types to suit any investor’s personal preferences and diversify their portfolio.

Different investment methods

There are several ways to invest in property.

A popular method is direct ownership, or direct investing, where an investor invests their money into a specific property without working with a third party. However, this method isn’t for all investors. Other property investment methods, known as indirect investing, include property stocks, Real Estate Investment Trusts (REITs) and peer-to-peer investing.

Read our direct v indirect investing guide to find the right option for you.

Potential for capital growth and rental income

Property investment can create financial gains for investors in several ways, including through capital growth and passive rental income. Capital growth (or capital appreciation) and rental income can be generated in several ways, from flipping properties to investing in build-to-rent properties, where rents can be rebased each year until the desired returns are met.

Discover investing opportunities with Acorn Property Invest, which offers capital growth and regular income.

Tips for diversifying your investment portfolio with property

Research all available investment options before committing

Before making any investment decisions, consider a deep dive into the market you want to invest in. By looking at future projections, investment opportunities, and past patterns, you could make a more informed decision that could lead to greater financial returns and help you avoid any unnecessary risk.

Seek professional advice

It’s a good idea to ask for advice when diversifying your investment portfolio. When diversifying your portfolio, consider talking with a seasoned property investor or independent financial advisor to find the right investment that aligns to your risk profile and takes a holistic view of your entire financial holdings.

Invest in various property types

Only investing in one type of property, such as commercial or residential, could lead to potential issues if there is a market downturn. Investing in multiple property types allows you to balance out property movements.

Choose a range of maturity lengths

Several property investments with different maturity lengths can help investors generate a consistent cash flow. Monthly passive rental income from residential property combined with 18-month terms can help you focus on long-term investment goals that will translate into long-term financial success.

Balance property investments with other asset classes

To optimise your returns and mitigate risk, investing in several property asset classes can be another way to ensure long-term financial success. Alongside real estate, you could also consider REITs, equity and fixed-income securities.

Why invest with Acorn?

If you’re looking for an alternative approach to investing in property, Acorn Property Invest offers two investors the chance to be part of upcoming developments from Acorn Property Group. With regular fixed-income payments or capital growth through fixed returns and profit share options, find out how to start investing with Acorn Property Invest.

Your capital is at risk if you invest

Investment opportunities available via Acorn Property Invest are exclusively targeted at exempt investors who are experienced, knowledgeable and sophisticated enough to sufficiently understand the risks involved, and who are able to make their own decisions about the suitability of those investment opportunities.

All investors should seek an independent professional investment and tax advice before deciding to invest. Any historic performance of investment opportunities is NOT a guide or guarantee for future performance and any projections of future performance are not guaranteed.

All investment opportunities available via Acorn Property Invest are NOT regulated by the Financial Conduct Authority (FCA) and you will NOT have access to Financial Services Compensation Scheme (FSCS) and may not have access to the Financial Ombudsman Service (FOS).