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  • Diversification – starting to think strategically

    We start to delve deeper into why one fund isn’t enough to secure your investing goals.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    When it comes to the nuts and bolts of successfully building your diversified portfolio, picking one fund isn’t the be all and end all.

    There’s more to it – you’ll need to start thinking strategically when you’re choosing your funds, with, of course, your core-satellite-play approach in mind too.

    This article gives you information to help you build a diversified portfolio, but it isn’t personal advice. If you’re not sure of the best course of action for your circumstances get advice. Our advisory service could help.

    So, let’s talk strategy

    First things first, let’s look at our diversification basics in a bit more detail.

    Investment types

    We know funds are the foundation to a diversified portfolio, but every fund will be slightly different. The investment types they hold and how much they hold will vary depending on the type of fund.

    A fund manager might offer an equity fund for example. This means the fund will mainly invest in company shares. Alternatively, they could offer a bond fund, so will mostly hold corporate bonds or gilts (UK government bonds). If you want something in between, you do have the option of multi-investment funds too.

    Shares could potentially offer higher rewards longer-term but are more risky than funds. Bonds can still offer potential for returns but are lower risk again. How much a fund manager invests into each, will depend on how adventurous or conservative the fund's objectives are. Smaller companies and emerging markets also carry more risk.

    Remember all investments and any income they produce can fall as well as rise in value so you may not get back what you have invested. A long-term approach should generally be taken.

    You’ll need to ask yourself, “how much risk is right for me?” when you choose your investments and regularly review them to make sure they meet your underlying objectives.

    There’s a world of opportunity

    When you’re investing in funds, they’ll usually focus on a specific area. These areas are called sectors.

    Sectors could be geographically where a fund is invested, or a sector like technology or property, or types of businesses like smaller or medium sized companies. This is the same for funds that are both actively or passively managed. Passive investments such as tracker funds aim to match the performance of an index and are generally lower cost. Active funds aim to outperform the index, though charges are generally higher to reflect the work involved by fund managers.

    Different sectors perform differently at different times – no one will always be on top. It’s important to hold a mix.

    The table below shows the performance of some of the main sectors over the past decade.

    Annual performance across the main sectors (July to July, %)

    Scroll across to see the full chart.

    Annual performance across the main sectors (July to July, %)

    Scroll across to see the full chart.

    Annual performance across the main sectors (July to July, %)

    Past performance isn't a guide to the future. Source: *Lipper IM to 31/07/21, IA sector averages.

    As you can see, stock markets are unpredictable, and the top performing sector has changed a lot. Past performance isn’t always a guide to who will be on top in the future.

    We’ve learnt it isn’t enough to just cover one sector when you hold individual shares. It’s the same with funds.

    Imagine you hold a fund that’s focus is to invest in Emerging Markets, but that’s the only fund you hold. You can see from the table, it would’ve been a bumpy road for you so far.

    Sure, by holding one fund you’re diversified in different companies. But if your entire portfolio is made up of investments dedicated to one sector, the benefits of diversification can disappear.

    If we look back to earlier in the series, we learnt that holding investments in one industry isn’t enough to successfully diversify your portfolio.

    Diversifying your investments ultimately spreads your risk, reducing the potential for higher losses. By choosing a variety of investments that aren’t closely related to each other, if one part of your portfolio is falling in value, the others could be going in the opposite direction but of course there are no guarantees.

    If you’re an HL client, you can use the Portfolio Analysis tool in your account to see which areas you could be missing and which areas you’ve already covered.

    Investing in funds isn’t right for everyone, if you’re at all unsure seek advice.

    It’s all a balancing act

    If you’re a bit stuck on how to balance out your portfolio, you can look at the size of stock markets globally to paint a bit of a picture.

    Source: FTSE Russell All-World, 30/07/21.

    US markets take up the biggest portion, making up more than 50%. This includes the New York Stock Exchange (NYSE) or S&P 500. Compare that to the UK, which only makes up around 4%. Of course, this will change over time as stock markets grow at different speeds, but it’s something you should bear in mind.

    You can use this as a benchmark to help decide weightings in your portfolio. In doing so, you know you’re well diversified across the board.

    How does it work in practice?

    If we go back to our core-satellite-play model, we know we need a good selection of funds for our core.

    Investing in developing countries across Asia and the Emerging markets for example, is usually higher risk than investing in more developed nations, like the UK or US. If you want to spread the risk, consider adding a global tracker fund. You can invest across global stock markets all in one investment.

    Remember a global tracker fund aims to track the performance of an index and invests in shares. This isn’t diversifying against different investment types. By holding a multi-investment fund too, this could help add some stability to your portfolio.

    Investment risk – fortune doesn’t always favour the brave

    When we think about our satellites, these are funds or shares that let you add a more personal spin to your portfolio. This might be a fund run by a specific manager you want to invest with, or an area or sector you think has long term potential you want extra exposure to.

    Remember though, investing shouldn’t be about making a quick quid – you need to let time do the hard work for you and regularly review it to ensure you’re on track.

    Ready to start diversifying?

    Our Investment research team have put together some investment ideas to help you get started with a diversified portfolio. They are not a personal recommendation to buy.

    You could look for diversification with a fund that includes different investment types across lots of geographies.

    Mixed investment funds can be a good way to start holding a variety of investment types too. They usually blend shares and bonds in different proportions.

    Investing in funds isn’t right for everyone. You should only invest in funds if you have the time and know-how to diversify your portfolio to help reduce risk.

    Before investing it’s important to check the fund’s objectives align with your own, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment.

    Remember, investments can go down as well as up in value, so you could still get less than you put in.

    Find out more about these funds, their risks and charges and Key Investor Information Documents.

    Investment ideas

    Legal & General International Index

    • Invests in thousands of companies around the world.
    • Gives access to sectors like technology, financials and healthcare.
    • One of the simplest ways to invest.

    Find out more

    Find out more

    Troy Trojan

    • Made up of a mixture of different investment types.
    • Investments from around the world.
    • Could bring some stability to a more adventurous portfolio.

    Find out more

    Find out more

    Legal & General International Index

    A global tracker fund could offer instant diversification to a long-term investment portfolio.

    Tracker, or index, funds try to track the performance of an index, instead of trying to beat it.

    The Legal & General International Index aims to track the performance of the FTSE World ex UK Index. It’s made up of markets like the US, Japan and Europe, but also includes some higher-risk emerging markets like Korea and Taiwan. The fund can also invest in derivatives, which can increase risk. Because of the size and strength of the US stock market at the moment, American companies make up almost two-thirds of the fund.

    The fund invests in around 2,200 companies, across sectors like technology, financials and healthcare. It mainly focuses on some of the world’s biggest and most established businesses.

    The fund is managed by Legal & General, one of the largest providers of tracker funds, with plenty of resource and expertise to try to track the market as closely as possible.

    An index tracker fund is one of the simplest ways to invest. This fund could be a good addition to a broader investment portfolio aiming to deliver long-term growth.

    More about this fund, including charges and how to deal

    Legal & General International Index Key Investor Information

    Troy Trojan

    Investing in a number of different companies isn’t the only way to diversify a portfolio. Different investment types could help too.

    Total return funds could be a good choice as a balanced option because they’re more conservative. They normally hold a mix of shares, bonds, commodities and currencies. This could offer modest growth over the long term and help shelter money when stock markets fall. But they aren’t likely to keep up with stock markets when they rise quickly.

    Troy Trojan is run by experienced fund manager Sebastian Lyon. Part of the fund invests in shares of well-established companies in countries like the US and UK and some smaller companies too, which can be more volatile. The rest invests in UK government bonds and US inflation-linked bonds, which could provide some shelter from rising inflation. It also holds gold and cash, which can help offer some stability when times are tough in the economy and stock markets.

    Overall the fund holds a small number of investments. This means each one can have a meaningful impact on the performance, but it does add risk.

    The fund could form part of the foundation of a broad investment portfolio, bring some stability to a more adventurous portfolio, or provide some long-term growth potential to a more conservative portfolio.

    More about this fund, including charges and how to deal

    Troy Trojan Key Investor Information

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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    Investing behaviours: what you need to know