How and Why to Diversify Your Portfolio

A well‑diversified portfolio will typically contain a mixture of these assets spread across different regions and industries.

Here, we examine some of the most effective methods for diversifying your portfolio and explore the potential benefits of doing so.

Why You Should Diversify Your Portfolio

When discussing the topic of diversification, experts are fond of using the phrase “you shouldn't put all your eggs in one basket”. While this may sound like a cliché, there is certainly truth to it.

If you invest all your funds in one company or sector, you could suffer significant losses if the value of that company or sector suddenly falls. Remember, the market can turn for any number of reasons, such as war, political upheaval, or the collapse of a major financial institution.

By spreading your funds across different types of investments (known as asset classes), you’ll have greater protection if a sudden downturn hits one asset class. In simple terms, you may suffer losses, but they may not be as severe. Over time, diversification’s main benefit is smoother, more consistent (risk‑adjusted) outcomes, not guaranteed outperformance.

Four key benefits of diversification

Protects against individual company failures

Having a well-diversified portfolio means that you avoid over‑investing in any single business. However confident you are in a business’ leadership team or products, history tells us that any business could suffer a shock collapse.

Lessens the impact of region-specific events

By diversifying your portfolio, you may be able to shield yourself against any risks specific to a certain region. Imagine you hold all your investments in companies headquartered in a certain country. The value of your portfolio could drop significantly if the country’s government suddenly collapses.

Diversification is a proven long-term approach

When you’re looking at financial markets, it is helpful to consider their behavior over the long term. This way, you could avoid placing too much emphasis on temporary ups and downs. Over time, well‑diversified portfolios tend to deliver less volatile journeys than those concentrated in one asset class or sector, although results will vary and losses are still possible.

Provides peace of mind

As investments often involve significant sums of money, it is perhaps inevitable that you’ll become emotionally involved in your portfolio. And of course, you’ll likely become anxious if you suffer major losses.

Having a well-diversified portfolio will reassure you that you aren’t as vulnerable to unforeseen events. This sense of reassurance can be especially valuable if you aren’t used to market volatility.

How You Can Diversify Your Portfolio

Choosing the right balance for your portfolio will, of course, depend on your circumstances. However, the steps below are good practices when building a healthy spread of investments.

Consider managed funds

Managed funds are one of the most popular ways for non‑expert investors to access a well‑diversified selection of investments.

These are collective investments, which means your money will be invested alongside other people’s funds. In most cases, these investments are split across different asset classes and geographical regions.

Examples of managed funds include open‑ended investment companies, unit trusts, and investment trusts. (These are UK structures. In the US, investors commonly use mutual funds and ETFs for similar pooled, diversified exposure. Always review the fund prospectus and holdings.)

Managers publish information about the spread of investments in their funds. Reading this before you invest can help ensure that you are comfortable with the level of diversification.

Try not to get spooked by market downturns

When you’re investing in financial markets, it’s easy to become anxious when faced with temporary market lows. This could lead you to pull out of your existing investments or to stop investing entirely. While this anxiety is entirely understandable, it could make it difficult to build a well‑diversified portfolio over the longer term.

One possible way to avoid this is to consider the dollar‑cost‑averaging approach. Using this strategy, you commit to investing the same amount of money in your portfolio over set periods of time, regardless of market conditions. This approach can help reduce timing risk and support discipline, but it does not guarantee better returns.

Thoroughly research your investments

Before you can achieve a truly diversified portfolio, it’s important that you understand the nature of all of your investments.

There may be little value in investing in a range of companies or funds that all have the same underlying risks. An example of this could be investing in a selection of businesses in the same region or sector. In this case, all your investments could suffer losses if there is a downturn in one sector or country.

Likewise, there may be little benefit to investing in a range of funds if all your fund managers are selecting similar types of investments.

Consider physical and non-physical assets

While we tend to think of investments as non‑physical assets such as shares in companies, tangible assets can also form part of a well‑diversified portfolio. Some of the most popular examples include real estate and precious metals, such as gold.

Let’s take gold as an example. Because gold has shown low (and at times negative) correlation to mainstream financial assets—especially during episodes of market stress—it can act as a diversifier. Its “safe‑haven” behavior is conditional and tends to be strongest in severe equity sell‑offs; it is not guaranteed in every downturn.

As a longer‑term trend, the price of gold has often moved inversely to the US dollar, but this relationship varies over time. Short‑term moves can be driven by rates, risk sentiment and flows.

For this reason, many investors will use gold as a way of hedging inflation over long horizons. In the short run, the link between monthly inflation and gold is mixed, so treat it as a potential hedge rather than a promise.

Different Ways of Investing in Gold

As discussed, gold investing is a popular option for those wishing to diversify their portfolios. While the right investment method for you will depend on your individual financial objectives, listed below are some of the best‑known ways to get exposure to gold.

Gold IRAs

A gold IRA is a type of self‑directed individual retirement account that can hold certain precious metals. To do this compliantly, you must use an IRS‑approved custodian and keep the metal in the physical possession of a bank or IRS‑approved non‑bank trustee/depository. Home storage or a personal safe‑deposit box is not permitted for IRA metals. Expect additional custodian and storage fees, and be mindful of fraud risks highlighted by regulators.

Gold ETFs

A gold exchange‑traded fund (ETF) lets you buy exchange‑traded shares that track the price of bullion, without arranging storage yourself. Ongoing costs are shown as an expense ratio and vary by fund—for example, GLD reports a 0.40% gross expense ratio (fact sheet 30 Sept 2025), while SGOL lists 0.17% (as of 31 Dec 2025). These vehicles can be more cost‑effective than buying and insuring physical bars or coins, though costs and tax treatment differ by product.

Stocks in mining companies

Rather than investing in gold directly, you could consider buying shares in companies that mine gold. Mining shares can amplify moves in the gold price and some pay dividends, but they are equities with company‑specific, operational and geopolitical risks and typically show higher volatility than bullion.

Gold bars, coins, and jewelry

If you decide to invest in gold directly, you can purchase the metal as bars, coins, or jewelry.

While we often see images in movies of gold as coming in large bars, this may not be the most sensible option for many investors. Selling your gold could prove difficult if a single bar represents all of your investments in gold; smaller denominations (e.g., coins) are often easier to liquidate in parts.

You’ll also need to consider how, and where, you’ll store your investment. Home storage, private depositories, and bank safe‑deposit boxes are common options. Note that the contents of bank safe‑deposit boxes are not insured by the FDIC, so consider separate insurance if needed. (For IRAs, metals must be held by an approved custodian/depository—home or safe‑deposit‑box storage is not allowed.)

The Price of Gold

Gold bullion is traded according to a value in dollars and cents per ounce. With substantial gains in recent years, the metal has been among the more resilient commodities in stressed markets.

Recent milestones: Gold crossed US$3,000/oz intraday in March 2025, and the LBMA PM price set 13 new all‑time highs in Q3 2025, with an average quarterly price of about US$3,456/oz. Records can differ across spot, futures and benchmark measures, so always check the reference used.

It is, of course, impossible to predict future gold prices with total certainty. Key drivers include real interest rates, the US dollar, risk sentiment and central‑bank demand. The gold‑dollar relationship is typically negative but not constant, and policy decisions can influence yields and currency without dictating gold’s path one‑for‑one.

Conclusion

Investing in financial markets can bring attractive long‑term returns and help you build a nest egg for the future.

Nevertheless, this strategy also carries risks, and markets can be unpredictable. While it is impossible to avoid risk entirely, a well‑diversified portfolio could mean you are less vulnerable to temporary market shocks. For many investors, precious metals can be a useful way to diversify alongside less tangible assets such as stocks and bonds—with the right access route and realistic expectations. Whatever you include in your portfolio, it can be helpful to seek the advice of a professional if you have any questions or concerns.