Diversification: a not so risky business

Every investment comes with risk. And higher risk is often seen as the price for higher rewards. But putting all your money into just one type of attractive investment can lead to rapid, and sometimes nerve-wracking, changes in value. Thankfully, there’s a simple way for investors to give themselves a less bumpy ride: diversification.

What is diversification?

Diversification is about making sure you have a mix of several different types of investment. That might be a variety of:

• Asset classes e.g. investing in stocks, bonds and property
• Regions e.g. having investments from all over the world
• Investment styles e.g. a mix of ‘growth’ and ‘value’ investing
• Industries e.g. holding stocks from tech, energy, and many other companies

By doing this, you ‘spread your risk’ and ‘limit your exposure’ to any one area.

Imagine for instance, that you only held stocks in British companies. If the U.K. went through a recession, all your investments could take a big hit.

But if you’d diversified with stocks from lots of different countries, those UK stocks would have a much smaller impact on your portfolio– and your other investments could potentially make up for the shortfall.

This is why diversifying and balancing your portfolio is so beneficial. Nobody can see into the future, so ensuring you don’t have all your eggs in one basket makes good sense. It helps protect you when things aren’t going well, and makes sure you can take advantage when the going is good.

The difficulty with diversifying

Diversification sounds simple in theory, but it can be tricky to put into practice. For non-professional investors, researching, selecting and balancing so many investments can be time-consuming and possibly overwhelming.

It can also cause costs to creep up pretty quickly. Because every time you buy and sell an investment, you incur a transaction fee. The more investments you have, the more transaction fees you’ll see.

Diversification without the drama

Funds and investment trusts are a straightforward way for a DIY investor to sprinkle some diversification into their portfolio. They’re a ready-made mix of investments, picked by professionals, and all put into one neat package.

So, although you have less control over each individual investment, somebody else is doing the hard work for you. And you only have to make one trade to invest in the fund – rather than investing in each of the individual investments in the fund – which keeps costs much lower.

Of course, being an investment trust ourselves, we’re big fans of diversification at Alliance Trust. We take great care to make sure we have a mix of different regions, sectors and investment styles in the portfolio. You can check out exactly how we invest, and how our fund managers bring lots of variety into the Trust. 

Past performance is not a reliable guide to future returns. Please note the value of investments and any income from them can go down as well as up. Your capital is at risk and you may not get back what you originally invested.

Towers Watson Investment Management Limited (“TWIM”), part of Willis Towers Watson, has approved this communication. This communication is intended for general information purposes only and it should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Willis Towers Watson to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this material should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice.