Investing in a diversified portfolio is one of the best ways to grow your money over the long term, while making sure you’re not concentrated in too much risk.
You’ve probably heard about the benefits of diversification when investing. The performance of a portfolio comprising different assets from around the world tends to be smoother over the long term than one that’s concentrated in a particular market or geographical region. It’s because the holdings don’t usually correlate with each other, which provides balance.
For example, when equity markets are falling, the price of government bonds typically goes up. This approach lowers overall risk because it dampens the impact of events in the global economy that affect financial markets. A diversified portfolio is also your best defence against a crisis because it’s rare that all the investments would fall substantially after a single event – like a sharp recession, an unexpected election result or a global pandemic.
Rotating into better days ahead
It’s a good idea to diversify exposure within each asset class too in order to spread risk. Industry sectors and geographical regions tend to perform at different speeds as global economic conditions change. For example, stock markets plunged in value at the start of the coronavirus pandemic in March and April last year but then recovered throughout the rest of the year.
Over the summer this recovery was driven by companies whose fortunes were lifted by the lockdowns. Most of them conduct all, or a big part, of their business over the internet and provide services to the home. They include online grocery and delivery companies, sellers of online exercise equipment and video streaming services. Large technology companies were the most notable winners. Then in November hopes that a successful vaccine could be deployed to slow the spread of coronavirus in as little as a few months triggered a powerful rotation into industries that are set to benefit most from the economic recovery. They included airlines along with energy, finance, real estate and retail.
In order to manage investment risk and gain exposure to the most attractive opportunities it’s necessary to continuously adapt to the evolving environment through an active approach. Sometimes it’s not the most obvious stocks that out perform, and it takes an experienced investor to spot the trends.
For example, when Pfizer announced successful vaccine trial results, its share price barely moved. Its revenues are driven by many other underlying issues and not one single drug – despite the significance. Yet the news was market moving for IAG, which owns a number of airline brands, including British Airways. Its share price rallied as investors looked ahead to an upturn in passenger numbers.
The fund managers behind the Omnis multi-asset portfolios can differentiate between firms like Pfizer and IAG. In periods of market stress, they allocate capital to companies that are likely to generate above-market returns. We choose active managers with investment processes and philosophies that we believe give them an edge in identifying
With cash savings rates still negligible and unlikely to rise any time soon, investing is the only way to preserve the spending power of your money against the impact of inflation. We’re confident about the year ahead and believe there will be plenty of attractive investment opportunities as the economy heals, particularly in trends that are driving the economy, such as new technologies and clean energy, as well as Asia’s emerging markets, which have coped relatively well with the pandemic.
We can help you explore tax-efficient savings and investment options, so get in touch.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.