This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).
A diversified portfolio (set of investments) spreads your money across different asset types and investment opportunities. There are many benefits to doing this, as opposed to concentrating your money on a small group of investments. Here at WMM; we passionately believe in the academic evidence supporting this approach, as it helps to reduce investment risk. After all, if one investment performs badly but the others don’t also suffer, then your portfolio is shielded from further damage during times of market volatility.
Clearly, this subject is timely in light of how markets have reacted to the spread of COVID-19 across the globe. We offer this short guide, outlining some diversification ideas by our financial planning team. If you’d like to discuss these matters with us or talk through your own investment strategy, then get in touch to arrange a free, no-commitment consultation:
Call us on: 01869 331469
#1 Spreading out assets
Many people think of investing as purely putting your money into the stock market. Whilst equities are typically important to a portfolio due to their growth potential, it’s important to also consider other assets so you are not overly-exposed to market shocks.
Cash investments, for instance, don’t offer high returns in today’s interest rate environment, but they are highly liquid and stable in the short term. Fixed-income securities such as gilts (UK government bonds), moreover, can be a useful way to balance a portfolio.
#2 Sector diversification
At the time of writing, many investors are noticing that their investments in sectors such as aviation, travel and hospitality have likely taken an excessive hit from the COVID-19 outbreak. Other sectors, might not have been so badly affected.
Jobs in government, health care, biotechnology, pharmaceuticals and nonprofit industries could see an increase in the coming months (although this is far from certain). Other companies involved in manufacturing, distributing or selling specific products such as toilet rolls or sanitizer products have experienced dramatic short term share price increases. Share prices simply reflect the latest news.
Diversifying your investments across industries and sectors, therefore, is another good way to spread out risk and identify investment opportunities.
#3 Global reach
Again, here the COVID-19 outbreak is a good case study for global diversification. Whilst the OECD has downgraded 2020 growth projections for almost all economies, it is also clear that the markets in some countries have suffered more than others. China (where the outbreak started) has had its previous GDP projection of 5.7% reduced to 4.9%, the U.S. was reduced from about 2.3% to 1.9%.
These are of course just predictions, however in this environment spreading your investments across the world helps to mitigate against excessive risk exposure within one country. In better times, however, it can help you to be ‘tapped-in’ to other economies who may be in different parts of the economic cycle than just your home country. Another benefit may come from having exposure to a host of different currencies, other than purely Sterling.
#4 Multiple businesses
Of course, it is still possible to follow the above ideas, and still not diversify appropriately. You should consider it important to invest in multiple companies. After all, if you invest into just one or two, then your portfolio will be hit hard if these businesses suffer or fail.
You don’t have to invest in one bond, property or stock. Here at WMM in Oxfordshire, our financial planning team often helps clients to invest in a collection of each of these assets; perhaps via OEIC funds, unit trusts or exchange-traded funds (ETFs) of institutional quality. For some of these options, you might be able to invest in hundreds of bonds or thousands of stocks through one fund.
If you are interested in starting a conversation about your financial plan or investment strategy, then we’d be happy to help you. Get in touch to arrange a free consultation with a member of our team here at WMM in Oxfordshire.
Call us on: 01869 331469