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  • Diversification – it’s all a balancing act

    We look at how rebalancing works, and why it’s important to keeping your investments diversified.

    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.

    While we like to think we’re rational beings, when it comes to our money, we can struggle to keep a disciplined mind.

    We all love a winner. If an investment is doing well, naturally, we want to stick with it. We’re much more likely to fight with our emotions whenever things get a bit hairy. This isn’t always the best approach to maintaining a successfully diversified portfolio.

    This article gives you information to help you maintain 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.

    What is rebalancing and why is it important?

    Successful diversification isn’t a one-time deal. Leaving your portfolio unchecked for too long is a lot like ignoring the ‘check engine’ light on your car’s dashboard – you’re leaving the outcome to chance. If you want your portfolio to stay on track, you’ll need to make sure it’s serviced regularly.

    Rebalancing does what it says on the tin. You’re restoring the original weightings of the investments in your portfolio to match the level of diversity and risk you planned on when you started out.

    As a whole, we use diversification to reduce risk. The aim is to invest in a variety of areas to maximise your potential returns because each area will react differently to the same event.

    That means the value of investments within your portfolio will change constantly. Market conditions, company performance and investor sentiment will all play a part in how your investments perform over time.

    As these changes happen, the amount you’d allocated to different areas will alter, as well as how risky your portfolio could be. Remember, you need to think strategically when you diversify.

    Sometimes these changes mean your portfolio no longer matches your tolerance and attitude to risk, even if you thought about this when you chose your investments. Times change, but you need to make sure your portfolio is still doing the task it was designed for.

    How much risk is right for me?

    Just like taking your car to a mechanic, the process of rebalancing your investments is an essential tool for maintaining the long-term health of your portfolio.

    Suppose you decided on 1 January 2010 to make your portfolio 50% international shares and 50% government bonds – we’re not suggesting this is a good mix, it is just an example and keeps the maths easy.

    In the decade leading up to 2020 global stock markets returned 198%, while UK government bonds returned 69%. That means by 1 January 2020, stocks would’ve made up 64% of your portfolio – not 50%. Remember past performance isn’t a guide to the future.

    How does it work in practice?

    You can rebalance your portfolio in two ways.

    One way is to use any new money, or money from a regular saving instruction, to top up any investments that haven’t done so well.

    Another way is to sell a portion from your investments that have done well, to top up investments that haven’t performed so well.

    It might sound counterproductive, but top performers usually come in waves – having investments moving in different directions is what diversification is all about.

    It has its pros and cons. Rebalancing can possibly create expenses like dealing charges or taxes. Make sure you’re rebalancing to stay on track with your objectives and stay diversified, but not so much that the cost of doing so is eating into your returns.

    Rebalancing your investments once or twice a year should strike the right balance between taking control of your finances and it not becoming a burden.

    More on reviewing your portfolio

    There’s no one-size fits all approach

    You might hear that phrase a lot but that’s because investing is personal. We all have different goals and a different length of time until we think those goals could be met. Over time these goals or the amount of risk you’re happy with might alter.

    You should check in when your circumstances change, or if there have been some big movements in the markets. That way your portfolio should match how much risk you’re now willing to take.

    As always, you need to think long term when you invest. When we say long term, we mean at least five years.

    If you don't have the time or confidence to choose your own investments, you could pay an expert to do it for you.


    Ready to start diversifying?

    Our Investment research team have put together some investment ideas to help you get started with diversifying a 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 go up and down in value so you could get back less than you put in.

    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 fund 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. Because of the size 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 and add risk.

    The rest invests in US inflation-linked bonds - which could provide some shelter from rising inflation – and UK government bonds. 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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