Why you should spread your
savings and investments
G U I D E T O
GUIDE TO PORTFOLIO DIVERSIFICATION
If we could see into the future, there would
be no need to diversify our investments.
We could merely choose a date when
we needed our money back, then select the
investment that would provide the highest
return to that date. It might be a company
share, or a bond, or gold, or any other kind of
asset. The problem is that we do not have the
gift of foresight.
Combining a number
of different investments
Diversi!cation helps to address this uncertainty
by combining a number of di"erent investments.
In order to maximise the performance potential
of a diversi!ed portfolio, managers actively
change the mix of assets they hold to re#ect the
prevailing market conditions. $ese changes
can be made at a number of levels, including the
overall asset mix, the target markets within each
asset class and the risk pro!le of underlying funds
As a rule, an environment of positive or
recovering economic growth and healthy risk
appetite would be likely to prompt an increased
weighting in equities and a lower exposure
to bonds. Within these baskets of assets, the
manager might also move into more aggressive
portfolios when markets are doing well and more
cautious ones when conditions are more di%cult.
when risk appetite is low
Geographical factors such as local economic
growth, interest rates and the political
background will also affect the weighting
between markets within equities and bonds.
In the underlying portfolios, managers will
normally adopt a more defensive positioning
when risk appetite is low.
For example, in equities they might have
higher weightings in large companies operating in
parts of the market that are less reliant on robust
economic growth. Conversely, when risk appetite
is abundant, underlying portfolios will tend to
raise their exposure to more economically sensitive
parts of the market and