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How diversification can smooth the bumpy road

2 months ago

From year to year, it is difficult to predict which asset classes will be the best performers. Most investment specialists agree about the benefits of spreading your money across different investments. This diversification can reduce volatility, smooth out highs and lows in returns and help avoid unnecessary risk.

Selecting the right mix

One of the major aims of diversification is to construct a portfolio of investments that don’t all behave in exactly the same way. So while one part of your investment portfolio could be falling in value, the others may be flat or rising to balance it out. This difference in potential returns could offer some protection against all assets falling in value at the same time. Selecting the right mix can help to even out the damage inflicted by downturns, recessions or just routine fluctuations in specific markets.

Market bumps are normal

Markets are unpredictable and it will always be difficult to foresee what will happen in the future. It may be wise not to take a short-term outlook, and avoid overreacting to immediate stock market moves. Taking a multi-asset approach could help to smooth out your returns. A well-constructed investment portfolio, designed around your time frame and keeping your portfolio diversified could be a prudent way to weather market uncertainty.

Asset allocation is king

Asset allocation refers to the decision of how much capital to invest and where, such as for example in stocks vs. bonds, in US vs. European stocks, how much to keep in cash and everything in between. Having the right balance - the optimal asset allocation - is what keeps you diversified in the market. Diversifying your investment portfolio across a range of asset classes, geographies and fund managers could help to reduce your overall risk.

Risky versus safe assets

If you need to protect yourself from the possibility of a short-term decline in the value of your portfolio, you are likely to follow the conventional wisdom of putting some of your capital into bonds rather than stocks. Over time this might well cost you money. Over the long run, stocks consistently outperform bonds. However, investing some of your money in bonds is likely to reduce the short-term ups and downs of your investment portfolio, which may allow you to sleep better at night.

Past performance is not a guide to future performance.

Download our ‘Guide to investing in volatile markets’

From time-to-time, financial markets can experience periods of volatility as recent events have shown. From the importance of diversifying your portfolio to a five-point investment checklist, this guide will give you information on all the things you might need to consider when investing through periods of volatility in the markets.

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