“Don’t put all your eggs in one basket” this Easter. Here’s why it’s important to diversify your investment portfolio

What better time to discuss diversification than Easter?

Whether you’ve choreographed a fun Easter egg hunt for your children or grandchildren, or are looking forward to indulging in one or more carefully selected, or kindly gifted, chocolate eggs, the old adage “don’t put all of your eggs in one basket” couldn’t be more apt.

Diversification is a key component to a successful investing. A well-diversified portfolio can help you minimise your risks while simultaneously maximising long-term growth potential.

Although a well-diversified portfolio can’t guarantee profitable returns, most investment professionals agree that it’s an important element of a well-crafted portfolio. And, done with care, it could mean you have a better chance to meet your long-term investment objectives.

Variety is the spice of life, and could pay over the long term

In essence, a well-diversified portfolio aims to reduce the effects of volatility on your investment portfolio.

Investing all your money in a small number of companies can be an extremely risky approach. One bit of bad news, such as lower-than-expected sales, regulatory changes, natural disaster, or a change in trends, could cause a company’s share price to tumble.

So, rather than putting all your money into a single company, investing across a range of different investments means that if one performs badly, others may do well. In turn, this approach improves your chance of enjoying greater returns on your investment portfolio, particularly over the long term.

How to diversify your portfolio

To create a well-diversified portfolio, you need to spread your money across a range of different types of investments and asset classes. Ultimately, you’re aiming to avoid having a concentration of funds in a single place.

For example, a diversified portfolio might invest across cash, equity, bonds, commodities, and property.

4 key asset classes for a well-diversified portfolio

Spreading your wealth over different asset classes should achieve a strong, well-balanced portfolio.

1. Cash

Secure and easily accessible, cash is generally considered to be the safest asset. However, it tends to provide lower long-term returns than other asset classes and its value can be eroded by inflation.

2. Bonds

A loan you make to a company or organisation from which you receive interest payments. While usually considered medium-risk, this depends on who is issuing them.

3. Equities (or shares)

An ownership stake in an individual company listed on a stock market index – the FTSE 100 in the UK or the S&P 500 in the US, for example.

Like you, most investors hold equity assets in funds, such as pensions, ISAs, or unit trusts, which are often pooled or collective investments.

Investing in individual companies tends to carry more risk, so a collective approach can be extremely beneficial, especially since funds are looked after by professional managers.

Because your money is pooled with other investors, you can usually access a range of investments that might otherwise be unavailable.

While history shouldn’t be considered a guide to the future, over the longer term equities tend to outperform other types of investment.

4. Alternative investments

Property is one alternative investment. Returns from property investments tend to deviate from those of shares or bonds, which may be useful if you want to introduce another source of potential capital growth and income into your portfolio.

While property tends to be less volatile than equity or bonds, its value can fall as well as rise and is also less liquid. For example, it can take longer to invest into and sell when you want to access your money.

Other alternative investments include:

• • Infrastructure funds (large, high-cost projects, often connected to public development of core systems such as transportation or electrical supply)
  • Natural resources (companies that are involved in the extraction of oil, gas, coal, metals, etc.).

Since asset classes are all affected by market factors in different ways, a diverse range of investments is more likely to provide relatively stable growth. As such, spreading your wealth over different asset classes can provide you with a strong, well-balanced portfolio.

Your financial planner can help ensure your investments are spread across appropriate asset classes, considering your time horizon and appetite for risk.

However, it’s not only the range of assets (such as equities, bonds, and currencies) that you need to consider when creating a well-diversified portfolio.

Sticking to the sweet treats analogy, a “pick and mix” approach is usually beneficial

Here’s a breakdown of the range of investments you could consider:

• • Geographical regions – the US, UK, Europe, or Asia
  • Sectors – finance, energy, or transport
  • Themes – technology, healthcare, or renewable energy
  • Size – smaller companies (small cap) or larger companies (large cap).

3 reasons diversification is key

A well-diversified portfolio can help you:

1. Minimise risk and increase potential returns

Diversification spreads risk and helps to limit the impact of market volatility on your investments. When one sector, asset class, or geographical area falls, a rise in another area could help to offset the loss.

2. Provide greater opportunity for returns and eliminate investment biases

Diversification can help prevent you from falling foul of investment biases. You may be overly confident about the performance of sectors you know, or geographical regions that you’re familiar with. These unconscious biases could see you miss out on potential growth, whereas a diversified portfolio won’t be constrained.

Read more: 4 difficult emotions that can negatively affect your investing decisions

3. Help you to consolidate gains

As your investment goal approaches, you might want to consolidate your gains. Diversification allows you to do this by rebalancing your portfolio, and increasing the number of lower-risk assets you hold.

This should help to avoid the value of your investments suddenly falling in value when you need to withdraw funds.

Get in touch

If you want to ensure that your portfolio is well-diversified and balanced according to your financial goals and specific time horizons, please get in touch.

Email us at info@harperlees.co.uk or call 01277 350560 to find out more and we’ll be very happy to help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.