Diversification is the process of spreading out your investments across different fields and industries, so that a downturn in one sector has little or no effect on your clients’ other investments. Building a diversified portfolio is one of the key elements in a company’s successful long-term growth strategy, if only because it buffers the company against risk and allows it to quickly capitalise on rising opportunities.
Diversification mitigates risk by putting a company’s investment capital in different baskets. If, for example, your company specialises in financing real estate for manufacturers, a slight downturn in Malaysia’s manufacturing sector could quickly turn into trouble. If you diversify by lending to service sector borrowers and develop a sideline in residential mortgages and government bond issues, you’re well-buffered against any single sector slowing down.
Another positive benefit of choosing to diversify investments is the way it keeps your foot in the door of multiple sectors at once. In the example of the realty lender, manufacturing might be doing fine, but the government could announce a major bond issue to take place in the next few months. If you’re already allocating capital to that sector, it’s comparatively easy to hop onto this major opportunity and earn some quick profits. This wouldn’t have been possible if you were wholly invested in a single specialist sector.
Diversification spreads out a company’s investment capital and helps provide a buffer against normal business cycles. It also makes it possible to take advantage of new and unexpected opportunities as they arise.
