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Diversification: how to make the most of it

Jonathon Curtis looks at the potential benefits of diversification for your investments.

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.

Diversification.

It’s almost universally accepted as a good thing when investing. Putting all your eggs in one basket is a big risk. If something goes wrong with that basket your entire portfolio could be left in pieces. By spreading your investments around, one or two bad eggs shouldn’t have too much of a negative impact on your portfolio.

But diversification isn’t just about the number of investments you own though. If you invest in lots of funds but they’re all similar, you’re not making the most of diversification. To get the best out of it, the funds should be investing in different asset classes, geographies, industries, and company types and sizes.

The table below ranks eight of the major Investment Association (IA) sectors over each of the past 10 years. Notice how none of the sectors consistently rank top or bottom. There’s really no way to know how different areas will do from one year to the next. Diversification means you don’t have to guess.

Past performance isn’t a guide to the future. Source: Lipper IM 31/12/2018

Out of the comfort zone

By investing in a wide variety of areas you’ll inevitably be investing in some that haven’t done well recently. Some investors might find this uncomfortable but we think the benefits you’ll gain from diversification will be worth it in the long run.

Investing in a diverse range of funds could provide some shelter when markets are tough. It also increases your chances of always having some strong performers in your portfolio. Of course it also means some parts of your portfolio may struggle when others are thriving.

But that’s the nature of a truly diversified portfolio. As our Head of Research Mark Dampier puts it, “I’d be worried if everything in my portfolio was doing well at the same time”.

Surely you’d want everything to do well though?

Winning streaks always end

It’s human nature to be drawn to winners and avoid the losers. But in investing, not much stays top or bottom of the performance tables for long. Today’s dog could be tomorrow’s chart-topper, and vice versa.

Only investing in what’s currently doing well means you might miss some star funds of the future. You could jump from top performer to top performer, but in many cases the best gains will have been and gone by the time you invest. And even worse, you might invest just as the performance reaches its peak and turns south.

If you’d invested in the top 10 IA UK All Companies funds five years ago (based on five-year performance), not one would still be in the top 10 today. It’s the same story with the IA Global sector – none of the top 10 funds five years ago would be in today’s top 10*. Past performance really isn’t a guide to the future.

*Source: Lipper IM to 31/01/2019

Putting it all together

To help you put together a diversified portfolio we’ve created the Wealth 50. It’s a list of funds we think have excellent long-term performance potential. We’ve grouped them by sectors to help you choose funds from a diverse range of areas. You’ll find explanations about what each fund does so you can make sure your portfolio’s really well diversified. On average, the funds on our Wealth 50 are available to you at a 30% discount on the average annual fund charge so they’re also great value.

If you don’t want to build a portfolio yourself, Portfolio+ offers a simple investment solution with plenty of diversification. You choose from a range of six portfolios by selecting whether you’re investing for income or growth, and how much risk you’re willing to take. It can be set up in minutes and gives you the freedom and peace of mind of having your investments looked after by our experts.

Investments will rise and fall in value, so you could get back less than you invest.

See the Wealth 50 list

More on Portfolio+

This article, like the Wealth 50 and Portfolio+, is not personal advice. If you’re not sure an investment is right for you please seek advice.

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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