Why diverse investing can be useful to new investors

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Whenever you Google 'investing', you'll see the word diversification. Diversity is a popular term in all walks of life to be sure, and the share market is clearly no exception. 

But when it comes to investing money, diversifying seems like a cliche. It almost sounds like the default thing to say when offering investment guidance, simply because it reduces the risk of a single choice. More chips across different roulette numbers, so to speak.

I guess that makes sense but it'd be good to understand this tactic a little better. I mean, is diversification a good idea right now, for example? Inflation is high, interest rates are rising and consumer confidence seems to have taken a Tom Burgess-level hit. And when it comes to the share market, everything seems a little dour in 2022 - or at least risky - mostly because the world economy is in flux. 

Now we can't give you specific investment advice at Mozo, but I can say that in my reading of the topic, diversification seems a well supported way to invest when there's uncertainty in the economy and subsequently, a volatile share market. Of course, it might also be a proxy tactic for those of us who don't understand shares nor have the time to analyse them. Warren Buffet once suggested as much.

But is that something to be ashamed of? I don't think so - there are experts out there who do the hard yards on share market research and as long as you understand where your money is going, it seems silly to not rely on their expertise. 

What are those ETF things all about?

One typical way to invest with a diversification strategy is through an Exchange Traded Fund (ETF), a pooled investment security that allows an investor to buy into a selection of sectors, companies or indexes. The handpicked nature of these shares across a range of areas theoretically spreads your opportunity to make money but also limits the chances of losing it, as you possibly would do buying into just one company.

So in effect, ETFs can give you exposure to hundreds of shares, where some will undoubtedly go up and others down - the wide exposure keeps things relatively steady or balanced, if you will.

Keep in mind that not all ETFs are the same. Some are more specific and narrow in nature, and investing in these can be much trickier if you don't know the lay of the land. It's possibly easy to get hooked on the hype of a more specialised or exotic ETF that focuses on one industry, and it's best to be careful with these. Seeking some expert advice first is your best move.

The last part of diversification worth noting is that you can put your money into companies that span the globe. In a globalised world, no single company performs in an economic vacuum and so buying shares in an ETF that factors in many varied companies across many sectors can be useful to less experienced investors. 

In short, owning shares across several regions seems a sound defensive move but also interesting, too.

Trends, traps and the lure of tech

All up, it's still important to read widely and understand where you're placing your money. Diversification isn't foolproof. For example, right now consumers are tentative and that can impact any consumer-centric industry. Consider tech, where disrupted supply chains and part shortages are like a series of never ending speed bumps. And yet the consumer's appetite to actually spend on new tech items right now is also in question. 

Global events have indeed tipped some sectors upside down. So with all that's happening, some research goes a long way. Some segments of an ETF might be performing well, say those weighted toward the energy sector, while others with tech stocks including the likes of Apple and Microsoft, might be slumping. 

Don't fret. Check these things before buying into them, and know that over the long-term, the general balance of an ETF can be helpful to your investment.

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