Diversification in investment: not putting all your eggs in one financial basket

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The saying goes don’t put all your eggs in one basket. In the same way, we believe it is important that your investments aren’t concentrated in one area but are instead spread over a range of assets within the investment universe. This is why diversification is one of our core investment beliefs

Most investors will be aware that investing in a range of assets across industries and geographies is considered a sensible idea. This can help reduce the negative impact of changing market conditions, without necessarily hurting long term returns.

A recent example of this has been the wildly fluctuating cost of fuel and other commodities. This has driven up the value of oil and gas companies, which lagged in 2020 and the first half of 2021. This is in direct comparison with several companies which had been performing well and have now begun to struggle. A diverse range of investments will have had a smoother performance over this period compared to those concentrated in one sector.

Variety of risks

While diversifying stock selection can offer some mitigation against risks, there will still be systemic or market-wide risks that could have negative implications. These include inflation, rising interest rates, or political instability – all three of which we are seeing in 2022.

Therefore, we also look to diversify across all asset classes, as bonds, equities, property, and alternative investments will react differently to the same market conditions. Asset allocation is another of our core Investment Beliefs, and by spreading investments across different asset classes, we can mitigate against a variety of risks.

While it is important to acknowledge that diversifying cannot eliminate risk, by combining asset classes that don’t move in perfect sync with each other, diversification should lead to reduced volatility and smoother returns.

Putting the belief into practice

We typically look to diversify your money at three levels: stock selection, the mix of fund managers and how St. James’s Place combines these funds into Portfolios.Fund manager selection is key in ensuring diversification, and a lot of time and effort goes into making sure St. James’s Place only work with managers who have a demonstrable edge in this regard.

St. James’s Place also look at how different fund managers work together in a multi-manager fund. A recent example of this was in 2021 when they merged their Alternative Assets, UK Absolute Return and Multi-Asset funds into its new Global Absolute Return fund. Part of the logic for the merger was that none of the original funds were diversified enough in their own right.

In creating this new fund, St. James’s Place removed some fund managers, rebalanced others, and added new fund managers. For the fund managers that were removed, or whose holding was reduced, it was not necessarily just related to performance.

Rebalancing was also done to ensure the fund was sufficiently diversified. Thus, when you diversify your investments, you reduce the amount of risk you’re exposed to in order to maximise your returns.

Please don’t hesitate to contact us at Rhodes Brook Financial if you wish to talk through your own or create a personalised investment strategy.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

Rhodes Brook Financial Limited is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services, more details of which are set out on the group’s website: www.sjp.co.uk/products.

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