There’s much to learn when it comes to investing. As well as getting to grips with the different kinds of investments available and the tax allowances, it’s also crucial to get the right balance of investments in your portfolio.
You might have heard the expression, ‘Don’t put all your eggs in one basket’, in relation to plenty of matters in life. When it comes to investing, following this advice can help your investments work better for you.
By learning about the power of diversification it’s possible to create a balanced portfolio and therefore invest with more confidence.
Having a well-diversified portfolio, where your money is invested in a range of investments that give you exposure to different asset classes – bonds as well as shares – regions and sectors, helps provide protection during times of market uncertainty and reduce the volatility you’ll experience.
Managing the fear of risk
One common barrier to making decisions when it comes to investing is fear of risk.
There’s no avoiding the fact that stock market investing comes with risk because markets go down as well as up. But where the skill comes in, is managing that risk. A diversified blend of investments is one way to do so.
In investment terms diversification is important because it prevents your entire portfolio being wiped out if a region or industry suffers something which sends shockwaves through share prices.
By learning the art of diversification you can reduce the overall risk of losing money, although you can never eradicate it completely.
Portfolio Manager Stephen Peters explains: “Your investment portfolio can be compared to an orchestra. It is rare that every instrument in the orchestra is playing the same tune, at the same time. Some will be playing the melody, whilst others play a complementary harmony.
“The combination of the two generally sounds better to a listener than just one by itself. A diversified portfolio will have some assets performing well, and others doing less well at any point in time, but its performance in the short and long term should be a better experience than just owning a single stock, country or asset class by itself.”
Diversified portfolios can help you make more rational decisions
When choosing investments, it’s tempting to head for those which have had a good year. However, it’s important to remember that the top performing sector one year does not always herald the same results the following year.
It’s therefore important to focus on compiling a diverse portfolio which can safeguard being overly exposed to just one asset class, region or industry.
For many investors, it can be difficult to remain calm in times of market crashes, whether in share or bond markets. It rarely makes sense to act impulsively and deviate from your long-term investment objectives and to upset the balance of a carefully constructed portfolio.
Alexander Joshi, Head of Behavioural Finance at Barclays, explains: “Well-diversified portfolios can both withstand and grow through the shorter-term ups-and-downs of markets. Diversification can help dampen volatility and, as a result, protect the investor from the emotions that it can induce. Thus a well-diversified portfolio provides the building blocks for clear and rational decision-making.”
Finding your balance
By learning about how you can best diversify your own portfolio, you can improve your chances of compiling a portfolio to weather many different economic and market conditions.
The Barclays Funds List is made up of funds from each of the investment sectors we believe are key for building a diversified portfolio. As well as including funds from different sectors, our list includes different types of funds – active, trackers and our own Barclays Multi-Manager funds.
If you can’t decide which to choose, you might consider a multi-asset fund where a fund manager decides on the mix of assets on your behalf. Multi-asset funds invest in a variety of asset classes, such as shares, bonds, property, cash and potentially even alternative assets such as gold.
A Ready-made approach to diversification
If you would prefer to take more of a hands-off approach with compiling a balanced portfolio of investments, you can get a little help from the professionals by using Ready-made Investments.
These are funds designed by our experts to give you a well-diversified global portfolio which will include exposure across the globe. We offer a choice of five Ready-made Investment funds all of which invest in a mix of shares, bonds and cash. The way they differ is in the level of risk they take.
So in a nutshell, all you need to do is choose what risk you feel comfortable with and our experts will do the rest.
Join our free event to learn more about one of the Key Principles of Investing, Diversification
