How to use diversification when investing
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
In times of market volatility, how can you minimise risk and maximise the opportunity for long term reward?
This is something investment managers look to do with your money, investing it in a way that aims to minimise short term fluctuations in the markets. Yes, there are periods of uncertainty where markets dip, but over the long term these lows can also be seen as opportunities to invest whilst funds are priced lower.
At True Potential, we use a process called Advanced Diversification that aims to reduce volatility and look to grow your money. Firstly, let’s explain what diversification is.
What is diversification?
Simply put, diversification is not putting all of your eggs in one basket. In an investment context, your investment may be split between regions. For example, the UK, USA and China. If one region underperforms, another region may do well, meaning your risk and reward is potentially balanced.
What types of diversification are there?
Simple diversification is a mixture of equities, cash and bonds. The disadvantage of this type of diversification is your risk isn’t as fully spread as multi-asset and advanced diversification. However, there can be opportunity in individual investments, just keep in mind that non-diversification is risky as your eggs are all in the one basket.
Multi-asset diversification offers a full range of asset classes and geographic regions from one fund manager. Th advantage is that your money is spread not just around the world, but also across industries and assets to give your money the potential opportunity to grow and mitigate exposure to a particular asset, which could increase risk of volatility. However, with just one fund manager, you are still limited to their thought process on how to diversify, there’s no diversification in terms of fund manager investment philosophy.
Advanced diversification is a blend of multi-asset investment strategies that aims to find opportunities for growth. It goes to the next level of Multi-asset diversification, by also diversifying fund manager styles.
At True Potential, we pioneered Advanced diversification to do more with your money.
We work with a range of world-class fund managers to create our unique range of Portfolios which are diversified by asset class, industry, region, investment manager style and approach. This builds on the premise that no one fund manager can accurately and consistently predict the market. There will always be winners and losers, and equally important different strategies perform differently across market phases.
Our in-house Investment Management team, led by Chief Investment Officer Jeff Casson, work with world-class fund managers on a daily basis, consulting with them across the globe – these fund managers are names you may recognise including UBS Asset Management, Goldman Sachs, and Allianz.
Unlike standard multi-asset funds, our Portfolios do not rely on the opinion or approach of a single fund manager, in fact we have access to the views of over 9,000 investments experts in 200 global locations.
With wide exposure to world-class investment managers, as well as diversifying their investment by asset class and geographic region, our clients benefit from having more potential to grow their money and manage volatility, all in one Portfolio
Why is diversification important?
Diversification is important because it helps to reduce risk and finds opportunity. Think about it in simple terms, if you invested all your money in one company and it went bankrupt, you’ve lost everything. If you invested all your money across many companies, you’ve increased your opportunity and reduced your risk. Diversification works in the same way on a much more technical and complex scale that requires the skills of investment managers.
Jeff Casson, True Potential’s Chief Investment Officer, said “The concept of diversification, or put simply not having all your eggs in one basket, is crucial to delivering robust investment outcomes. We believe that our unique approach to advanced, multi asset diversification is a means of providing our clients with superior outcomes.”
Why does diversification help in volatile markets?
When markets are volatile, diversification works by being agile to reduce risk and find opportunity. Our in house investment management team can react, working with our fund managers around the globe to structure your investments in response to what we are seeing in the global markets. Remember, volatility, ups and downs in markets, are normal. An investment can never just be a straight upward line of growth, there’s always going to be short term fluctuations. Diversification works by giving you a wide range of exposure to parts of the market that may be performing better than others.
This is why investors can remain calm amid recent market volatility. Remember, that investing is not for the short term.
Short term fluctuations in a year are normal. Think back to 2020 and the dip we saw with COVID, ultimately many who stayed invested made money that year. However, past performance isn’t a guide to future performance.
A long term disciplined attitude, and investing into diversified Portfolios, gives you the opportunity to do more with your money.
Log in to your True Potential app today and look at the breakdown of your investments to understand more about how your money is diversified.
With Investing, your capital is at risk. Investments can fluctuate in value, and you may get back less than you invest. Past performance is not a guide to future performance. This blog does not constitute a personal recommendation or financial advice.