All of us have been told not to put our eggs in one basket at one time or another, and this old adage rings true when it comes to building an investment portfolio.
If you have money to spare and a thirst for risk, it's possible to generate income from all kinds of different investments.
For instance, investing in property historically provides a regular flow of income from tenants, government bonds pay regular interest, and stocks and shares are always popular.
While there are dozens of other types of investment out there for you to choose from, the key message remains clear: don't rely on just a single asset - diversification is vital.
Investing in a single asset leaves you vulnerable to volatility in the marketplace, and it's important to know that the value of your asset can fluctuate over time. To put it in the clearest terms, you may not get back what you've invested.
This article focuses on five things to consider when diversifying your investment portfolio, but you should always seek professional advice if you want to take this further.
Select multiple different investments
You can avoid making losses on your investments if you invest in a range of assets likely to perform differently in different circumstances.
For instance, holding government bonds, which provide regular interest payments, could help offset any losses from poorly-performing stocks or shares.
That's because stocks and shares are generally more risky, while government bonds are considered to be a safer investment option.
Use different sectors to spread investments
Investing in the banking sector was a popular option prior to the economic downturn following the collapse of Lehman Brothers in 2008.
Those who solely held investments in this sector would have experienced big losses, while those who had invested in the precious metals would have been relatively unaffected. Remember former Prime Minister Gordon Brown selling half the UK's gold reserve in 2009? That's one reason why.
The moral of the story is that if one sector experiences a downturn, it will not necessarily impact on investments held in another sector.
Look around the world
Another tip for diversification is to consider investing in different regions or countries around the globe, but this approach is not for the faint-hearted.
For example, markets in developing countries, such as Brazil and India, can offer more lucrative rewards compared to investing in developed nations, like the USA and UK.
However, it's important to note that investing in developing countries carries a greater risk of your asset depreciating in value.
Unit trusts and OEICs
Collective investment schemes, such as unit trusts and open-ended investment companies, can open doors to businesses, bonds or property.
You buy shared funds in which a fund manager pools your capital and invests into such assets, while there is no limit to how many shares or units can be created.
The quantity and range of assets held by collective investment schemes provide you with an easy option for diversifying your investments.
This diversification ensures your risk is spread, lessening the impact of a poorly performing company having too negative an impact on your returns.
Give it time
As a rule of thumb and regardless of which investment they hold, investors who are in it for the long run usually see better returns than those who run at the first sign of trouble.
Be prepared to take the rough with the smooth in the knowledge that your investments can fall as well as rise over time.
And if you've sufficiently diversified your investment portfolio, you should be able to absorb any losses your investments make.
Seek expert advice before you invest.