Diversify your portfolio

Published by on 24 June 2010.
Last updated on 25 June 2010

multicoloured pie chart

"The old phrase 'don't put all your eggs in one basket' couldn't be more appropriate when it comes to your investments," says Justine Fearns, investment research manager at independent research manager AWD Chase de Vere.

"A diversified range of investments should help you achieve your financial goals by evening out the ups and downs of the stockmarkets over time."

To get diversification in your portfolio, you'll need to spread your portfolio across four different asset classes. These are, in order of risk: cash; fixed interest (gilts and bonds); property; and equity, which is also known as stocks and shares.

Each asset class has a different risk rating and, although everyone should have some exposure to each, the proportions will vary according to your attitude to risk.

For example, if you're more cautious, you should have a higher percentage of cash and fixed interest than someone looking for as much growth as possible with a portfolio full of equity and property.

Cash aside, there are further opportunities for diversification within the asset classes.

For example, within equities you can gain extra variety by investing in the shares of different sized companies, different industries or different countries or regions around the world.

Generally, risk increases as the size of the company reduces, with small caps (smaller companies) usually seen as higher risk than the large blue chips.

You can also plump for something even more exotic. Investments in areas such as commodities and emerging markets are regarded as highly volatile, but can deliver tasty returns.  

You'll get more diversification in a collective fund such as a unit trust or an open-ended investment company. These invest in anything from 25 to 200-plus different companies. This is much easier and cheaper than buying lots of shares yourself.

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