The art of diversification

6 min read 25 Oct 21

We believe that keeping your investments well diversified is one of the golden rules of successful investing. Diversification in this sense means investing in a good mixture of asset types so you won't have 'all your eggs in one basket'. This can help spread the risk to your investment and over time, a good mix means the potential for more consistent returns. 

The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

Take a look at our glossary for explanations of the investment terms used throughout this article.

At a time when stockmarkets are flying high, it may be tempting to question why you would consider investing in anything other than equity funds (shares in a company), while in less stable periods the perceived safety of bonds can be seen as a more attractive option. But the very nature of investing means that there are no guarantees as to what will happen in the future.

We believe that you should never invest by following trends, market rallies or hearsay. Similarly, you should not invest your money and then rest on your laurels. We firmly believe that each investor needs to consider how long they want to invest for, their financial goals and how much risk they are willing to take. Then, keep an eye on their investment and make changes if needed to help keep investments in line with original goals.

The relationship between markets and investments continually changes as does the relationship between risk and reward. Therefore any investments need to be proactively managed.

What, where and when

There is a common misconception that being well diversified means you need to spread your money across a wide range of fund managers or investment providers. This is not necessarily the case. Your overall returns and exposure to risk are mainly determined by choice of asset class(es), geographic region and when you first invested in the most part.

Drilling down a little further, diversified returns can also be generated from the range of holdings in which individual asset classes invest. For example, some bond funds may contain both government bonds – government issued fixed income securities, normally paying a fixed rate of interest over a given time period, at the end of which the initial investment is repaid and corporate bonds – company-issued fixed income securities. Corporate bonds can offer higher interest payments than bonds issued by governments as they are often considered a little more risky. European and global bonds, and even currencies all have the potential to behave differently, thus adding another level of diversification to your investment.

Ways to diversify your investments

You can diversify by asset type…

Different asset types, like equities, bonds and property, tend to behave differently under various conditions at a given point in the economic cycle. As a result, their performance will likely be very different to one another.

If you are looking to maximise your investment over a long period, you may choose to invest with more of an equity bias (shares in a company) as this is likely to give you the greatest potential for long-term growth. However, if you are approaching retirement and are looking to preserve your wealth and secure a regular income, you may choose to invest more of your portfolio in bonds.

…or geographically

Geographical diversification is based on the concept that financial markets in different parts of the world can behave differently from one another at different times.

Whilst investing globally carries its own level of risk, this should be weighed up against the potential for higher returns, which can result from exposure to companies with alternative business models, markets and consumer behaviour. Alternatively, you can let the experts do the work for you.

Multi-asset investments

Multi-asset funds are becoming increasingly popular with investors. When markets are constantly moving, it can feel more comfortable to put decisions on how to spread your investments in the hands of expert fund managers who aim to achieve the right blend of asset classes at the right time for their customers. 

Active multi-asset managers monitor how the assets in their funds are spread and can vary the amount held in any particular asset type in response to movements in the markets as and when necessary. In this way they aim to optimise returns generated by these opportunities, while minimising any potential risk.

As no one can be sure how any one asset type will perform in the future, or what the economic conditions will be, it is important to invest according to the level of personal risk you are prepared to take in order to be in the best position to achieve your objectives.

Remember, to find out more about the different asset types M&G has to offer you can take a look at our range of helpful M&G Guides in our online Help centre

The value and income from a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

The views expressed in this document should not be taken as a recommendation, advice or forecast.

By M&G Investments

The views expressed here should not be taken as a recommendation, advice or forecast.

The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested. 

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