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A portfolio can be diversified in two ways: between asset classes and within asset classes. The first decision is how much of your money should be allocated to different asset classes such as equities, bonds, property, commodities and cash.
The second involves spreading your capital within asset classes and reducing the investment specific risk. For example, equities can be diversified further by geography and bonds by the type of instrument.
Along with this, you can also consider the fund’s investment style. Would you like a manager to focus in investing in British companies or one investing in smaller companies? Do you prefer managers to find companies with strong growth prospects or companies which are considered undervalued?
Here are some factors that can help you diversify your own portfolio:
Funds - Buying and holding funds is a good start as these will provide you diversification on a particularly asset class or investment strategy, so instead of just investing into one company, it can invest in a range that is aligned with the fund's objectives. In addition, it can also help reduce risk - if you have money invested in a fund no single company can hurt you too much. Your portfolio value will still rise and fall, but those swings will be smaller because they’ll be based on the collective movement of an entire group of companies instead of just one.
Go global - Having exposure to the rest of the world and not just one country’s stock market will help boost diversification. This gives you the opportunity to take advantage of geographic regions with superior investment prospects. By sticking to your home market, you may miss out on growth or, indeed, income opportunities elsewhere.
Use different strategies - Fund managers tend to have different investment styles but if you build a portfolio full of growth funds or income funds then your portfolio may not be very well diversified. It will perform well in certain circumstances but not in others.
Balancing your portfolio - If you have too many funds then you may find that no one fund will make a meaningful contribution to the performance of a portfolio. Typically, we would suggest a diversified portfolio can be achieved with as little as ten funds. It is also recommended that you regularly review your portfolio to make certain that it remains suitable for your needs.
We understand how intimidating it can feel to try to choose from a multitude of investments. That’s why our research team have put together some ready-made investment options which might be a good starting place if you prefer some help with acheiving a diversified portfolio.
Ready-made portfolios are single funds that have underlying investments in a range of different types of assets. These are ideal for those who would prefer a professional rebalancing the assets for them as the funds are managed within defined risk parameters.