A diversified portfolio mitigates risk to reach financial goals

When Fatima earned her first salary, she visited a gold market to buy a coin as an investment. At the same time, she started saving up for a down payment on a home. She is also looking at digital assets and shares as potential investments. This is an example of diversified investment. Diversification works as a risk management strategy so that when one type of asset or investment is affected due to any reason, the other investments continue to grow.

Diversification works in multiple ways. The first rule is to diversify across asset classes such as Shari’a compliant equity, Sukuk instruments, real estate, exchange-traded funds, commodities, and cash equivalents . 

Investors also diversify across sectors and industries. Some of your money can be invested in a high-grown sector while some amount can be set aside for mature sectors and industries, considered relatively safer. Investors also choose varying risk profiles to balance a portfolio. Some assets can be high-risk while the others can be medium- or low-risk. Maturity timelines can vary as well, ensuring that you are as liquid as you need to be depending on your life stage. 

Diversifying for managing risk

Reduced risk: Even if one asset is performing poorly, a diversified portfolio has the potential retain overall value, as other assets make up for the poor performer.

Long-term strategy: A diversified portfolio is usually set for the long-term, not necessitating frequent changes for it to hold its value. It also allows an investor to meet their long-term goals, instead of worrying about short-term effects on each type of asset. 

Different types of diversification

• Investors who are diversified spread their risk across asset classes such as equity, Sukuk securities, real estate, and digital assets.
• They also spread their risk across securities within a class. For instance, withinsecurities an investor can invest in government Sukuk , corporate Sukuk, and Shari’a compliant bank deposits.
• Geographical diversification helps the portfolio retain value even if investments in one location trend downwards.
• Diversification can also be achieved byinvesting in different industries, sizes of companies, or lengths of time for income-generating investments.