Diversity: the cornerstone of good investment practice
Written by Carl Turner on June 10, 2014.
Imagine you held major investments in structured notes issued by Lehman Brothers on the 15th September 2008. It would have been a black day for you indeed. You might have believed that those investments were a safe bet given that they were covered by a ‘100 per cent principal protection’ guarantee and generally considered to be risk-free. However, the moment the bank filed for bankruptcy, that guarantee, and those investments became worthless. You would have lost your money.
The fact is that no stock market investments are free of risk. Over the last decade there have been all too many examples of ‘safe’ companies going bust and investors losing almost all their money (Enron and General Motors to name two high profile ones). Indeed the stock market as a whole can collapse and wipe fortunes from portfolios literally overnight. On Black Monday in 1987 the stock market suffered its biggest ever percentage loss in one day when 22.6% was wiped off the value of shares.
In the modern world, major bankruptcies and stock market crashes affect everyone who saves in one way or another because the financial system and the global economy is so interlinked. So how can an individual investor protect themselves?
Diversification is the answer. This is the spreading of investments across lots of different assets in order to minimise losses. That doesn’t just mean shares in different companies. In my view for most investors risk is best managed by diversifying across different asset classes. An asset class is a group of investments or securities which tend to react in a similar way in the financial marketplace, and which are governed by the same rules and regulations. The main ones are equities, corporate and government bonds, property, commodities, hedge funds and cash. Each of these offers different levels of risks and return so when one is doing badly, the chances are that others will be reacting differently to market conditions.
Of course, any individual can cherry pick investments to ensure diversification but this is a time-consuming process and there is an easier way. A Multi Asset Portfolio is an investment fund made up of deposits from many individual investors and invested by a professional fund manager across different asset classes. Returns are paid to investors in proportion to their initial investment. The fund manager will actively manage the portfolio, adjusting the ratio of asset classes in response to market conditions, allowing investors to benefit from upside without losing the protection of the diversity.
If you would like an easy solution to diversifying your investments, contact me to find out how a MAP could work for you.