We have seen how unexpected events can impact on investment markets – with Brexit, Donald Trump becoming President of the United States, the run up to the French Presidential polls and Theresa May calling a surprise UK general election.
With the lesson of uncertainty in mind, how can we arrange our investments to cope with future uncertainty? Diversification is key, with the aim of creating a set of investments – a portfolio – that includes a range of types of assets that will behave in different ways whenever events occur.
So as an extreme example, if you were to invest all your money in the shares of a single company, the risk would be very high. You would do really well if it prospered, and really badly if it encountered difficulties. But by investing in several different companies – preferably in different industries and economies – you would reduce the risk. When some shares might disappoint, others could be doing well and the risk would be much lower.
Diversified assets
Of course, in worldwide booms and recessions almost all companies in all markets will move together – at least to some extent. It therefore makes sense to diversify into a range of other assets as well as shares, in particular bonds and cash. These types of assets are less volatile than shares, in particular bonds and cash. These types of assets are less volatile than shares but the scope for growth from bonds and cash is normally rather less than from shares, though this is not always the case.
Risk and reward
The more you are prepared to take on risk, the more you should expect to be rewarded for it (at least in the longer term, though this isn’t guaranteed). At the core of your portfolio is likely to be equity funds that hold shares in a range of different companies, as well as bond funds that hold government and corporate fixed investments.
Remember that other types of assets can provide diversification, such as property funds, commodities and absolute return funds (where the managers aim to provide positive returns in all market conditions – at least in the medium term).
Working with you to decide the right mix of investments to meet your aims and approach to risk is at the centre of what we do.
The Financial Conduct Authority does not regulate tax advice. Tax laws can change. The value of your investment can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long term investment and should fit with your overall attitude to risk and financial circumstances.
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