What is meant by diversification?

Diversification is a key principle to consider when undertaking financial planning and investing. Having exposure to different assets can help spread risk. In other words, it is sensible not to put all your eggs in one basket.

When investing everyone does so against a backdrop of an unknown future, where a number of different scenarios could occur, with some more easily foreseen than others. The events of 2020 have proved an extreme example of this. Diversifying helps to build portfolios that can be more resilient to shocks, whilst still aiming to produce strong long-term returns.

Typically diversified multi-asset portfolios will include domestic and overseas equities, government and corporate bonds, property and cash. These all have different sensitivities to factors like economic growth, company profits, regulation and interest rates. Although it should be noted that nearly all asset prices have benefited in tandem from the long-term decline in interest rates.

If choosing to invest in a single asset class, diversification remains important. Again, set against the 2020 pandemic investments in some sectors such as Travel and Leisure have suffered sharp falls, whilst Technology shares have soared. Holding a mix of shares exposed to different sectors and geographies improves portfolio resilience, whilst still benefiting from longer-term economic and profit growth.

If you are ready to have a conversation about how you could build an investment portfolio, speak to one of our financial experts.