Choosing To Diversify Your Portfolio
Successfully achieving your long-term investment goals requires balancing risk and reward. By selecting a broad range of assets in line with your attitude to risk, objectives and time horizon, diversification aims to provide the potential to improve returns for your elected level of risk.
Building a diversified portfolio including a mixture of different asset classes, involves identifying holdings whose returns have historically moved in opposite directions. This aims to ensure that, if a certain part of your portfolio is performing poorly, the rest of your portfolio is hopefully thriving. You can therefore potentially offset some of the impact of poor performance on your overall portfolio.
By selecting different geographic regions and sectors you can diversify further within each asset type. You can also diversify by market capitalisation (small, mid, large cap). Not all caps, sectors and regions prosper at the same time, or to the same extent, so you may be able to reduce portfolio risk by spreading your assets.
You should also consider styles, such as income, capital growth, or a mixture of the two, according to your objectives.
Finding the Right Balance
Collective investments, such as unit trusts, OEICs (Open Ended Investment Companies), investment trusts and ETFs (exchange traded funds) allow for risk diversification by providing investors with access to a portfolio of holdings
through purchasing one or more unit or share. There are thousands of pooled investment funds available, focusing on different sectors and countries. So rather than purchasing one direct equity, a fund will provide you with a whole array of underlying equities. Individual equities have a valid place in a larger portfolio.
Selecting the right amount of funds is important; if you choose too many, you run the risk of over diversification, diluting the impact of the individual funds. The ideal scenario is to select enough funds to diversify, allowing conviction in your investment strategy.
It’s also important to analyse the underlying holdings in a fund to minimise duplication and over concentration in a single stock.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
It is important to take professional advice before making any decision relating to your personal finances. Information within this blog is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation, are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. The value of investments can go down as well as up and you may not get back the full amount you invested.
The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.