What is the definition of Diversification?

The definition of Diversification in simple words, is “the act of investing in a variety of different industries, areas and financial instruments in order to reduce the risk that all the investments will drop in price at the same time” 

 

I returned from a week’s holiday on Monday morning, aware of the market turmoil. I often remind my clients when these downturns occur (and they will) that we: “don’t put all your eggs in one basket”. Diversification is key. 

The last few days have undoubtedly been challenging and may well be going forward for a period. Markets have dropped on Monday, bounced back somewhat on Tuesday and appear to have started down again on Wednesday, so volatility remains. 

As I write this (Weds AM) the FTSE100 sat at 7,769. Whilst this is down from a 52-week high of 8,908, it is not even at a 52-week low (7,544) yet! 

 

The average annual returns of the FTSE100 have been 5.0% over the last 10 years and 5.6% over the last 20 years. This period has included the global financial crisis (2008) Brexit (2016) and Covid-19 (2020) to name just three market impacting events. Investing is a long-term play for most. 

 

Worth bearing in mind too that for most advised clients, their investments are linked to their risk assessed attitude to risk, so highly unlikely they would have 100% of their assets in the FTSE100. Most of my clients, certainly those near or at retirement, may only have a portion of that equity exposure (perhaps 40% or even less) and global exposure at that, not just to one index. 

If you have an adviser, you’ll likely feel this week like you have had a bloody nose with the markets. However, I doubt there will have been any broken bones. This will be down to having a diversified portfolio in place. A good adviser will also hold you to the long-term plan and ensure that you don’t panic and sell at the wrong time (the dip) and then buy in again when the market returns to increased levels. 

 

Stick to the plan, stay strong, keep the faith