Diversification is key in uncertain times
The outbreak of coronavirus (COVID-19) has understandably been dominating the news headlines. Market fear over the escalating global spread of coronavirus has seen a sell-off across many asset classes. This period of market stress further emphasises the importance of diversification within portfolios. Investors’ objectives can rarely be met by investing in a single asset class.
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Diversification means making sure your portfolio has varied investments: investing in bonds and stocks, in different industries, and in small and large companies. Whilst ‘don’t put all your eggs in one basket’ is a well-used phrase, it is still relevant today and means: don’t have all your money in one place, as you could lose it all in one go.
Range of assets
During the early weeks of the coronavirus outbreak, the response from financial markets was somewhat muted. However, as the virus has continued to spread, markets have reacted in a more pronounced way to the impact on global demand, supply chains and tourism
This further strengthens the case to invest across several asset classes to provide greater diversification potential. Therefore, if one asset class performs less favourably, it can potentially offset another that is performing favourably, providing more balance to your portfolio when market shifts occur. Investment returns vary significantly between different asset classes or investment ‘baskets’ year-to-year.
By holding well-diversified assets at both asset-class and geographical level, our portfolios experience a relatively smoother return profile because risk exposure is less concentrated.
Investment options span every sector of the property, stock and bond markets, but allocating your assets based on performance alone is often ill-advised because the market is a moving target. One year, a particular type of security can be a star performer, only to severely underperform the very next year.
Different investors are at different stages in their lives. Older investors may have a shorter time horizon for their investing than younger investors. Risk tolerance is a personal choice, but it’s good to keep perspective on personal time horizons and manage risk according to when access to funds from different assets is needed. If cash is needed in the near term, it is better to sell an asset when you want to sell it rather than when you have to sell it.
Under normal market conditions, diversification is an effective way to reduce risk. If you hold a diversified portfolio with a variety of different investments, it’s much less likely that all of your investments will perform badly at the same time.If you hold just one investment and it performs badly, you could lose all of your money. The profits you earn on the investments that perform well offset the losses on those that perform poorly.
While it cannot guarantee against losses, diversifying your portfolio effectively and holding a blend of assets to help you navigate the volatility of markets is vital to achieving your long-term financial goals while reducing risk.
As well as investing across asset classes, you can further diversify by spreading your investments within asset classes. For instance, government bonds and corporate bonds can offer very different propositions, with the latter tending to offer higher possible returns but with a higher risk of defaults, or bond repayments not being met by the issuer.
However, although you can diversify within one asset class for instance, by holding equities in several companies that operate in different sectors this will fail to protect you from systemic risks, such as international stock market volatility.
Timing the market
Resist the temptation to change your portfolio in response to short-term market movement. ‘Timing’ the markets rarely works in practice and can make it too easy to miss out on any gains.
Over the long term, investors will experience market falls which happen periodically. Generally, the wrong thing to do when markets fall by a reasonable margin is to panic and sell out of the market – this just means you have taken the loss. It’s important to remember why you’re invested in the first place and make sure that rationale hasn’t changed.
Optimal balance of risk and return
Whatever your approach, diversification can help to manage your investment risk. If you would like further information or to discuss your requirements, please contact Lawsons Equity on +44 (0) 2033 935 920 or email firstname.lastname@example.org
Lawsons Equity is licensed by the Malta Financial Services Authority as Enrolled Insurance Brokers under the Insurance Intermediaries Act 2006, and to provide Investment Services under the Investment Services Act, 1994.
Information is based on out current understanding of taxation legislation and regulations. Ant levels and bases of, and reliefs from, taxation are subject to change. The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not a reliable
indicator of future performance
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