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The importance of diversification

The pandemic has highlighted the value of holding a well-diversified portfolio of investments.

The Covid-19 pandemic has already taught us a great deal; and some people have been faced with relearning old lessons they may have forgotten. Global stock market performance has changed radically since February. While nearly all markets took a sharp downturn in February and the first three weeks of March, there has been a marked divergence in behaviour since then. The table below shows how differently the various main markets have performed.

MarketIndex31/12/19 - 23/3/20*23/3/20 - 20/10/20Year to 30/10/20
UKFTSE 100-33.79%+11.68%-26.05%
USS&P 500-30.75%+46.15%+1.21%
EuropeEuro Stoxx 50-33.63%+19.02%-21.01%
JapanNikkei 225-28.61%+36.06%-2.87%
ChinaShanghai Composite-12.78%+21.22%+5.72%

* 2020 year-to-date low point for UK, US and China markets

The 2020 performance of the two main UK equity fund sectors, UK All Companies and UK Equity Income meant that at 30 October they occupied the bottom two slots of the 39 sectors monitored by the Investment Association.

Diversification between markets is not only about capital performance, it can also be visible in comparisons of dividends. For example, in the second quarter of 2020 the year-on-year fall in UK dividends was a brutal 54.2% while in Japan it was just 4.2%.  

The turbulence of 2020 has been a reminder that investment diversification can help smooth both capital and income performance. For a review of your existing investment holdings and advice on your diversification strategy, please talk to us.

The value of your investment, and the income from it, 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 in with your overall attitude to risk and financial circumstances.