The importance of investment diversification
When you’re looking for help with investing for later life, having a diverse portfolio can be a great option for managing risk and benefitting from long-term value.
Get yourself on the right path for your investment management journey by providing exposure to a diverse range of asset classes in one go.
Diversity is important. When you’re constructing and managing an investment portfolio, you need to ensure you have a good mix of investments as this can help protect your return.
If you’re reliant on a few core holdings in a particular sector or asset class, an unforeseen event could have negative consequences for your portfolio.
Choosing from plenty of smart investments
The good news is that retail investors have a far greater degree of choice than they enjoyed in the past. They can hold any number of different asset classes – from shares to commodities, bonds and currencies – in the same way as a professional would.
But while diversification is important, it’s also crucial that you do not spread your holdings too thinly. As a rule of thumb, monitoring more than 20 investments is difficult for all but the most active investors.
A solution is to invest in simple, low-cost, diversified funds and exchange-traded funds. One of the advantages of collective investment is that you can build a diversified portfolio, even if you do not have huge amounts of money to invest. You could, for example, put £1,000 in a fund with 100 separate holdings. Funds are also a means of gaining exposure to fast-growing markets, such as China or India, which would otherwise be difficult for a retail investor to access.
There are thousands of different funds to choose from, although you could narrow down your selection by looking for those with a decent track record of performance. You can’t guarantee this will be replicated in the future, but you can probably have greater confidence than you would in a fund with a very patchy track record.
You should also choose a range of sectors and assets that work independently from one another. That way when one is doing well, and another isn’t, you know at least part of your portfolio is on track. Similarly, if you invest in a combination of shares and funds, steer clear of owning funds which hold large stakes in individual shares you already hold.
5 ways to diversify using ETFs
The simple way to diversify your investments
A straightforward way of achieving diversification is through multi-asset funds, which invest in other funds or in a mix of shares, bonds, direct property and cash across different countries and sectors.
Multi-asset funds are included in the Investment Association’s sectors ‘Mixed Investment 0-35% Shares’, ‘Mixed Investment 20-60% Shares’ or ‘Mixed Investment 40-85% Shares’. The name of these indicate how much of the fund's portfolio will be invested in stocks and shares.
There are rules about their holdings in other asset classes and currencies, but the exact exposure will vary from one fund to another so don’t assume they’re all the same. There are lots of different investment styles within each sector.
The way you approach diversification is unlikely to stay the same. At different stages of your life your attitude to risk will vary, which will affect the balance of your portfolio. For example, a 35-year-old with 20 years of further employment ahead of them may feel they can afford to take more risk with their investments than a 50-year-old nearing retirement.
April 2018
Investment Edge
This article first appeared in the April 2018 issue of Investment Edge Magazine, a digital magazine packed with tips and advice for investors.
EQi does not provide investment advice. Investment Edge is provided by Shares Magazine and is the author’s view and is not the view or opinion of EQi and EQi accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.