Why should you diversify?

The beauty of a well-diversified portfolio…

Following the COVID-19 outbreak, we now find ourselves in unprecedented times, with the FTSE 100 falling in excess of 30% since the start of 2020 having experienced the single worst trading day since 1987 during this market downturn. Undoubtedly such events cause uncertainty and unrest. Such market conditions highlight the importance of a well-diversified portfolio, both geographically and by asset class, to provide an element of protection to capital. It is important to act rationally and remember the often medium to longer time horizon for these investments, but if you’re concerned speak to a financial adviser.

Typically speaking, there are four main asset classes; equities (stocks and shares), fixed income (bonds and fixed interest), property and cash. Some fund managers include a fifth class called ‘alternatives’ to further diversify a portfolio, which could include the likes of; fine wine, art, antiques or commodities.

At Wingate Financial Planning we assess an individual’s risk profile as a starting point to our discussions, and that will ultimately determine the make-up of the portfolio and the specific percentage in each of the asset classes. Generally, a portfolio with a higher exposure to equities will be more adventurous than one with a lesser exposure.

Investing across all asset classes provides a wide spread. Some, but not all, assets will have a negative correlation i.e. when one is performing well, the other isn’t. Where we have seen the equity market plummet, the likes of fixed income and cash have acted as shock absorbers against the losses from equities – this is why we diversify.

Individuals would need to be comfortable with the associated risk of the implemented portfolio and understand the potential downsides. With additional risk, comes additional volatility. When markets are performing well, a more adventurous investor is likely to see greater returns, whereas in market downturns the opposite is true with greater losses possible.

Therefore, it is highly unlikely that a well-diversified portfolio would have experienced the drastic falls we have been hearing about in the news. Returns may turn out to be negative during 2020, but we would not expect those of a well-diversified portfolio to be to the same extent as a single major indices such as the FTSE All Share.

Are you concerned about your existing investment strategy and how its performed? Please get in contact with one of the Financial Planners at Wingate Financial Planning. We would be happy to answer any questions you may have.

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