It tends to be the case that the values of different assets move independently of one another and for different reasons. In broad terms, the performance of shares (“equities”) are affected by the results and prospects of the company and the economy, fixed interest securities (“bonds”) are influenced by interest rates, while property values are more closely aligned with economic performance.
Diversification is the process of spreading your money around different types of assets, sectors and geographical locations so that your exposure to any one of them is limited. Allocating your money around the different asset classes including cash, equities, bonds and property helps to reduce your exposure to risk and volatility.
If one investment in your portfolio performs poorly, over a certain period of time, other investments that you hold may perform better over the same period. This will reduce the potential losses that could have arisen if you had concentrated your capital in just one type of investment. A low “correlation” of assets is desirable – if they were highly correlated, the assets held would move in the same way at the same time.
Designing a diversified investment strategy is not necessarily all about boosting performance, a key aim will be to provide the level of investment risk that you are comfortable with, based on your chosen investment goals and time horizon.
How we can help
If it has been a while since you looked at your investment portfolio, now could be a good time to arrange a review. You may be interested in reading our case study, in which we explain how we provided one particular client with a carefully balanced investment strategy.
It is never a good idea to adopt a buy-and-forget approach to managing your investments as you could end up with a portfolio that no longer reflects your goals and risk tolerance. Should you wish to discuss this in more detail please feel free to contact us.
t. 01483 508580