Expert, flexible approach to accumulating and managing wealth We provide clients with an expert, flexible approach to accumulating and managing their wealth. Understanding your financial circumstances is crucial in making sure we tailor the right investment solutions for you. Regardless of what stage of life you’re in, we can help you to protect and grow your wealth.

 

The starting point and usual way to protect your portfolio is to spread your risk across several different types of investments. There are many different assets in which you can invest, each with different risk characteristics. The main assets available are shares, corporate bonds (also referred to as ‘fixed interest’), cash and property. While individual assets have a bearing on the overall level of risk you are exposed to, the correlation between the assets has an even greater bearing. The aim is to select assets that behave in different ways so, in theory, when one is underperforming, the other is ‘outperforming’. Fixed interest investments and property, for example, usually behave differently to share-based investments, as they tend to offer lower, more consistent returns. This provides a ‘safety net’ by diversifying away from many of the risks associated with reliance upon one particular asset, as potentially whilst one asset class is showing poor returns, other asset classes may be countering this with more positive returns.

Simpler solution

Rather than track lots of individual assets, which can be a daunting task, a simpler solution is to invest into collective funds containing those assets and leave the diversification worries to professional management. If appropriate to your particular situation, you could spread your investments into different shares or bonds to ensure that your portfolio is exposed to a plethora of different types of investments rather than, for example, having shares in just a few large companies. In this way, share-specific risk can be reduced should one of those companies experience difficulties.

It is just as important to spread your investments across different sectors (a sector being an area of the economy where businesses share the same or a related product or service, for example, pharmaceuticals, telecommunications or retail. Companies are classified by the sector in which they reside, which is dependent on the goods or services they sell or provide. For many reasons, companies within different sectors perform in very different ways. By diversifying across sectors, you can access shares with high growth expectations, without over-exposing your portfolio as a whole to undue risk.

Sensible option

It’s natural to feel more comfortable investing a portfolio in your home market, but this is not necessarily the most sensible option. Because investments in different geographical economies generally operate in different economic cycles, they have less-than-perfect correlation. That’s why greater geographical diversification can help to offset losses in a portfolio and potentially help to achieve better returns over time.

This is another important aspect to consider when building an investment portfolio. Some investment funds use a ‘passive’ strategy. This means they simply track the performance of a chosen index, for example, FTSE 100. Other funds use an ‘active’ approach and aim to beat the index by using their own research and analysis to select shares they believe will achieve greater returns. There are many reasons for using both types of strategy, and we will be able to recommend an approach suited to your needs.

By investing in collective investment funds, this also potentially has the effect of reducing the overall risk taken, as you are spreading the risk with numerous other investors. As there are more investors, this usually means there is more capital for the fund managers to invest and, therefore, potentially allows the manager to invest in a wider range of investments and asset classes.

The value of investments and income from them may go down. You may not get back the original amount invested. This information sets out the basics of portfolio diversification. It is not designed to be investment advice and should not be interpreted as such. Other factors will need to be taken into account before making an investment decision.