Diversification is the answer; what was the question?

The last three months have reminded investors that reward is related to risk. With just a few exceptions, asset prices have fallen. There have been significant and surprising differences in asset classes – in a period when there has been so much focus on rising inflation, it seems odd that inflation linked UK government bonds would be amongst the worst performers. And in a period when the environment has been in the news, it seems odd that shares, which have positive ESG (Environmental, Social and Governance) characteristics, should have underperformed general stockmarket indices.

The current economic and stockmarket situation might be similar to the past, and it’s tempting to imagine that investment values may follow the same trajectory as they did in 2008 or 1974. But it’s important to recognise that the present is always different to the past; and nobody knows what will happen next. However, bad news will always make good headlines.

Our ideal portfolios are more diversified than many, including exposure to differing stockmarket investments, a wide range of bonds, investment property and, sometimes, cash and gold. Whilst diversification is always important, the effects of diversification become more apparent at times like this, when volatility is high (that’s financial speak for “when asset prices are falling”). If your portfolio is diversified, and you need to withdraw money from it, you can at least choose which asset class you should take your money from. That’s why we recommend a spread of assets and why we usually recommend funds made up of only one asset class.

I’m afraid that we don’t know the answers to many of the questions people are asking (“Will stockmarkets continue to fall?”, “How long will inflation remain high?” etc.).

But we do know that the best answer to most investment questions is “diversification”. It has served investors well since records began, and there is no reason to imagine that it won’t continue to do so. We recommend investments for our clients based on the long-term outlook, and in the knowledge that investment risk and reward are related – there will be times when asset values fall and our advice takes this into account.

Philip Wise | philip@sussexretirement.co.uk

Managing Director and Chartered Financial Planner

The value of investments may go down as well as up and you may get back less than you invest.
Past performance is not a reliable indicator of future performance.

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