Diversifying your investments – Don’t put all your eggs in one basket

We know with near certainty that investment markets will rise and fall. What we don’t know is exactly when the rises and falls will occur, by how much, or how long they will each last. Which is why it is important to diversify your investment – this helps you work towards both maximising your gains and minimising your losses¹.

Your nest eggs

Diversification in investing is often explained as ‘not putting all your eggs in one basket’, which seems intuitively obvious.

The ‘eggs’ can be thought of as different assets that are of the same type, called ‘asset classes’. The most common ones are equities (shares in companies), bonds (loans to the government or to companies) and, property and cash. Diversification can also be achieved across different industry sectors like technology, energy, health care, banking and utilities. And across the geographical regions including Europe, North America, Asia and Emerging Markets.

However, when diversifying, financial advisers, working on your behalf, are not just looking for a wide range of asset classes, sectors and regions. They are always looking for something else too - or rather they are looking for the absence of something – and that something is called correlation.

Correlation

This is a statistical measure that indicates how the different assets move in relation to each other, this helps investors to assess the degree of diversification across their assests². The correlation between assets is the key to efficient diversification.

A positive correlation between assets (anything above 0) usually means that the investments move in the same direction over a specific time frame. The higher the positive correlation, the less likely you will benefit from diversification.

On the other hand, a negative correlation (anything below 0), usually means that assets move in the opposite direction which potentially offers more diversification benefits. To get the most out of diversification, assets would need to have a low or negative correlation to create a balanced and stable portfolio so that it can better withstand different market conditions².

How we can help you

We can help you identify how much you need your investment return to be, over what time period, and with the level of risk that you are comfortable with. Then as your professional financial adviser we will combine asset classes, sectors and regions into a multi asset portfolio or fund and aim to maximise the investment return for that level of investment risk.

Or to put it simply, to ensure that you are not taking any more investment risk than you need to in order to achieve the level of return you need.

Past performance is not a guide to future performance.