Is it time to diversify my portfolio?
This year has seen huge market volatility, not least because of COVID-19 and the anticipated ‘Australia-style’ no-deal Brexit. In March, the pound reached a 35-year low versus the dollar, throwing the UK into a period of recession from August. Whilst it remains unlikely that we’ll see such high levels of volatility again this year, safeguarding investments and mitigating risk are now priorities for many.
Diversifying investments is a phrase that is often made synonymous with risk management. Whilst this by no means ensures investments are risk free, a well-diversified portfolio could offer investors some peace of mind in periods of great volatility.
What does diversification mean?
The aim of diversification is to receive the highest return for the lowest risk, by allocating investments in a variety of different industries and among a mixture of stocks, fixed income and commodities. By investing in assets which react differently to the same event, you give your investments some protection to market fluctuations and collapsing industries.
What are my options for diversification?
There is no set formula for a well-diversified portfolio, with multiple methods and schools of thought. Investors may balance cyclical and non-cyclical stocks, for example. Cyclical stocks tend to follow market trends, whilst non-cyclical stocks are items and services deemed essential such as gas and electricity. As these are necessities, it is likely they will always be in steady demand. In times such as recession, where consumer confidence in the economy is low, the value of non-cyclical stocks will tend to increase, as consumers will generally save their money for essential goods. In turn, the value of cyclical stocks will decrease.
Mutual funds allow you to purchase a share in a pool of investments, spreading your wealth across a variety of stocks and bonds. If shares in the fund go up in value, your asset will appreciate and vice versa. Whilst it’s important to remember that your returns are by no means guaranteed, mutual funds ensure your investments are well-diversified. Often these are run by fund manager, the cost of which will be deducted from your fund assets, along with any transaction fees.
There are three main types of mutual fund:
- Fixed income funds – invest mainly in bonds and debt securities, allowing for preservation of capital
- Equity funds – invest mainly in stocks
- Multi-asset funds – invests in a variety of asset classes
How will my returns be affected?
When you invest, there will always be an element of risk. Therefore, diversification by no means guarantees your money is safe. You should also bear in mind that reducing the risk of your investments can negatively impact your returns, compared with high risk investments with the potential for high returns. Thus, building a well-diversified investment portfolio that mitigates risk whilst accruing maximum returns is a nuanced skill to be honed over many years.
A financial planner can help to answer any questions you may have regarding your investments. If you would like to talk to a member of the team here at gpfm, please don’t hesitate to get in touch over email firstname.lastname@example.org or call 01992 500 261.
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.