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Benefits of diversification

The benefits of diversification

Why diversify your investments – and how to do it

Important - Please remember unlike the security of cash the value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice, if you are unsure of the suitability of an investment for your circumstances please contact us for personal advice.

Anna Wotton
Research Editor

How to prepare when predictions are impossible

Excited for a sunny holiday, you pack a variety of summer clothes, flip-flops, and sun cream. But instead of the balmy, blue-skied break you were promised, the weather resembles England in October – rainy, windy and not an ice-cream in sight.

If only you’d bought a coat, a pair of warmer shoes, and an umbrella.

When investing we’d love the warmth and sunshine of growth and fortune all the time, but we can only expect it in spells. We always need to prepare for the rain as well – by diversifying.

Diversification means spreading your money (and risk) across different types of investment. You can diversify by asset – like shares, bonds, funds, cash and property – and by investing across the globe.

Prepare when you can’t predict

Investing in a single share is riskier than choosing a mix. If you own a part of just one company and they do well, so will your share. If the company has a tough time, the share price will too. Putting all your eggs in one basket could bring great reward – or huge losses.

Different types of investment have different aims – so they won’t all perform well at the same times.

But simply holding lots of investments doesn’t mean your risk is spread properly either, the investments need to be different. Holding shares in ten different banks might feel diversified, but if that sector takes a hit, so will your portfolio.

Instead, focus on variety. While it might feel uncomfortable to put your money into stocks or funds which aren’t doing well right now investing should be viewed for the longer term. When the tide turns, and it usually does, you may well be in the right place to benefit. Remember all investments can fall as well as rise in value though and you may not get back what you invest.

Next – Asset allocation

Emma Wall
Head of Investment Analysis

Now you understand the benefits of diversification, how to implement it in your portfolio? The easiest way to spread your risk around is through investing in different asset classes. The big groups are shares (equities), bonds, property, commodities and cash.

Traditionally, a multi-asset portfolio is made up of equities, bonds and cash. Equities and bonds tend to perform in an uncorrelated manner – when one is rallying the other typically lags behind and vice versa.

A lack of correlation is what you want in a well-diversified portfolio, investments with different drivers of returns which can mean whatever the weather you grow your wealth. Cash is kept in the portfolio to add liquidity, i.e. to be ready to snap up bargain investments quickly in a market downturn.

In many ways cash is the ultimate way to diversify. Think of it as an insurance against falling stock markets.

Remember no matter how diversified you are investments can always fall as well as rise in value, so you could get back less than you invest.

Equities – take your share of profits

Diversifying your investments with equities

We think equities are the best asset class for long-term investors. Stocks – or funds which invest in stocks – offer the best opportunities for growth. Either through share price appreciation, or through re-invested dividends, or a mix of both.

However equities can also be more volatile than bonds, their prices tend to fluctuate a lot more. And they can go through longer periods of underperformance – while returns from bonds are generally fixed.

Bonds – of interest?

Diversifying your investments with bonds

When you invest in bonds you lend money to companies and governments.

Bonds offer a ballast to hairy equity markets. Buying a bond at issue and holding it for the full term means that you’ll get back both your initial investment plus the loan interest. Bonds traded on the secondary market offer an opportunity to make more on your starting investment, but on the whole the returns aren’t as variable as equities, on both the upside and the downside.

Ever since the global financial crisis a decade ago, and the subsequent slashing of interest rates across the developed world, bonds have offered lower levels of return. Much like cash back accounts, governments and corporates are simply paying you less to borrow your money. Where the UK Government would have paid you more than 6% to borrow money for five years in 2000, today it’s less than 1%.

But when stock markets fall, bonds have tended to cushion those losses. For income investors, bonds offer a more dependable yield. Unlike a stock’s dividend which can be cut or cancelled, a bond pay-out – or coupon – is paid for the term, be it months, years or decades, so long as the borrower can keep up with repayments.

What about alternatives?

Diversifying with alternative investments

As well as stocks, bonds and cash there’s another rag-tag group of assets known as alternatives. These are assets that have little or no correlation with global stock markets and range from the well-known, such as property, to the more obscure, like aircraft leases.

Commodities, renewable energy investments, private equity, hedge funds and even art fall into this category. Experienced investors use alternatives to add diversification to their portfolios, but they can be far more volatile and higher-risk than traditional assets on their own.

How to blend assets

Asset allocation can contribute up to 90% of portfolio performance, so getting the mix right is key. Dependent on your risk appetite, age, income requirements and whether you’re in or approaching retirement you might want to allocate more or less to shares, bonds and alternatives – considered higher-risk assets.

Next – A world of opportunity

Dominic Rowles
Investment Analyst

As well as a good asset mix, it is important to diversify globally too. While the UK's home to one of the world's best stock markets, the UK makes up just 5.7% of the broader global stock market, so not investing overseas could mean you miss out on sizeable returns.

The performance of different countries’ stock markets can (and will) vary. In fact, the best performing stock market changes almost every year.

That is because, like asset classes, different stock markets around the world have different drivers of returns. Some markets may rely on commodity prices, while others are more sensitive to currency fluctuations, or government policies.

What might be more surprising is that a region that performs well one year is often towards the back of the pack the following year. But remember past performance isn’t a guide to what will happen in the future and all investments can fall as well as rise in value, so you might get back less than you invest.

Take a quick look at the rankings of UK in the table below to see this demonstrated – third on the list in 2014-2015 only to fall to last in 2015-2016.

As you might expect the position of emerging markets jumps around even more. First in class some years but right down at the bottom other times.

Regional geographic performance breakdown

Scroll across to see the full image.

Past performance is not a guide to the future. All figures calculated in GBP. Source: Lipper IM to 31/12/2018.

That's why we think it makes sense to invest your portfolio globally. If you keep a foothold in most areas, you don’t need to predict – or guess – which area will do best each year. And it'll make your portfolio less vulnerable to bad news that impacts a single country or region.

Next – How to diversify your portfolio

Emma Wall
Head of Investment Analysis

Kate Marshall
Senior Investment Analyst

Now what?

There’s no hard and fast rule for how many investments you should hold in a portfolio. Too few can add risk, while too many can be hard to manage and mean any gains are diluted. As a rule of thumb we’d suggest holding no more than 20 funds. For most people only 10 funds are needed for a well-diversified portfolio.

But how can you tell if you are properly diversified? Using our Portfolio Analysis tool, click through to the X-ray analysis to help identify any gaps in your holdings. What does the asset allocation pie-chart reveal?

See our Portfolio Analysis demo

Only own equities? It may be time to consider buying some bond funds. And if the X-ray regional allocation pie-chart reveals you are 80% in the UK, you may wish to consider diversifying globally.

If your X-ray analysis reveals a good spread of asset classes and geographical allocations, well done – you’re probably diversified enough. Use this opportunity to pat yourself on the back.

And don’t forget your cash, by spreading your savings around between easy access and fixed terms of different lengths you can earn a much better return than having it all in one place.

Simple strategies to get more from your cash

Please remember unlike the security of cash investments can rise and fall in value and you may not get back what you have invested. This should not be seen as personal advice, should you be unsure of an investments suitability, please seek advice,

Outsourcing asset allocation

asset allocation

If the prospect of picking the best stocks, bonds, property, commodities and cash seems overwhelming, there are some talented multi-asset fund managers who will take on the task for you.

Schroder Managed Balanced is a fund-of-funds; a pre-diversified portfolio in a single, convenient investment. It invests mainly in other Schroder funds, tapping into the expertise of several experienced managers. Between them they cover a broad range of assets including shares and bonds.

The manager Johanna Kyrklund chooses how much of each fund to invest in, depending on her view of the world. We think she's done a good job investing this way. In our view she's supported by one of the best-resourced teams in the UK. The fund's offered at a low cost of 0.33% for HL clients, and is part of the Wealth 50 list of our favourite funds.

The fund's performed steadily better than the sector since it launched in 2007, and the manager doesn't want the fund's performance to stray too far either way from the benchmark. It's not always been so steady though. It raced ahead of the benchmark in 2009, and had a tough period in 2015. Since then performance has improved, though past performance isn't an indication of future performance.

Schroder Managed Balanced - performance under Johanna Kyrklund

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Lipper IM to 30/09/19.

Annual percentage growth
Sep 2014 -
Sep 2015
Sep 2015 -
Sep 2016
Sep 2016 -
Sep 2017
Sep 2017 -
Sep 2018
Sep 2018 -
Sep 2019
Schroder Managed Balanced -2.3% 17.7% 10.6% 4.8% 2.5%
IA Mixed Investment 40-85% Shares 0.3% 15.7% 9.4% 5.3% 4.1%

Past performance is not a guide to the future. Source: Source: Lipper IM to 30/09/19.

More about this fund including charges

Schroder Managed Balanced Key Investor Information

Getting help to go global

global diversification

Investing in a global fund is one way to get exposure to the world's major stock markets, if you don’t want to balance your portfolio yourself.

The HL Multi-Manager Special Situations Trust gives you exposure to 19 of our favourite fund managers who invest across global stock markets which includes higher risk emerging markets. Each has an outstanding track-record of identifying excellent companies, and avoiding weaker ones, combined with a genuine passion for investing.

Our research team meets hundreds of fund managers each year. We scrutinise their investment strategies and analyse their performance to identify those capable of doing better than their peers over the long run. We think the extra layer of management that you get on our HL Multi-Manager funds makes up for the higher annual charge.

The fund remains focused on small and medium-sized companies. We think many small and medium-sized companies with outstanding potential go overlooked by investors. This means there are plenty of opportunities for dedicated managers to uncover diamonds in the rough. It's a higher-risk area to invest though.

The fund’s long term performance speaks for itself. An investment of £10,000 made when the fund launched in April 2001 would now be worth £38,220*. The average fund in the IA Global sector would be worth £30,160*, although past performance isn’t a guide to the future.

HL Multi-Manager Special Situations Fund performance

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Lipper IM to 30/09/19.

Annual percentage growth
Sep 2014 -
Sep 2015
Sep 2015 -
Sep 2016
Sep 2016 -
Sep 2017
Sep 2017 -
Sep 2018
Sep 2018 -
Sep 2019
HL Multi-Manager Special Situations Trust 4.0% 21.0% 15.0% 8.3% -0.6%
IA Global -0.1% 27.2% 15.0% 11.8% 5.9%

Past performance is not a guide to the future. Source: *Lipper IM to 30/09/19.

This fund is managed by our sister company HL Fund Managers Ltd.

More about this fund including charges

HL Multi-Manager Special Situations Trust Key Investor Information

Don’t neglect your cash

What to do with your cash

Ensuring you have the right amount of cash should mean you won’t have sleepless nights about your investments. Most people should have around three to six months’ worth of expenses in cash, and the risk averse should probably have more.

With interest rates so low many of us overlook our cash, feeling it’s not worth the hassle of spreading out around to get better returns, but that’s a mistake. With the average easy access account paying just 0.44% you’re losing money in real terms, taking inflation into account.

That’s why we’ve launched Active Savings, a new way to save that makes it simple to get much more from your cash. So why not find out more and take your first steps to becoming a better saver?

Improve the way you save

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017 with firm reference 751996 for the provision of payment services. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).