Jargon Buster: What is Diversification?
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.
Welcome to another instalment of our jargon busting series. As you may be aware, our True Potential Portfolios use diversification. But what is this? This article aims to tackle this question and see why fund managers support diversification as much as they do.
What is diversification?
Essentially, diversification can be thought of as not putting all of your eggs into one basket. Multiple investments, such as stocks and bonds, are combined together with the intention of reducing risk to your portfolio. The investments chosen are broad and spread across various assets and geographic regions. Fund managers are responsible for establishing the investment strategy and selecting appropriate investments with the aim of potentially maximising returns, but equally mitigating risk through diversification.
Diversification Types
Diversification has evolved over the years, from simple (traditional) diversification, to more complex multi-asset portfolios that offer greater levels of diversification. True Potential have now taken this one step further using advanced diversification.
Simple diversification involves creating a portfolio with traditional asset classes, such as Stocks, Bonds and Cash. Blending these asset classes does offer diversification benefits, however even these asset classes can become correlated.
Multi-asset diversification could offer greater protection than your traditional portfolio as your investments are spread across a broader range of assets, such as hedge funds, commodities and property.
Advanced diversification is a term coined by True Potential to describe the strategy used for our True Potential Portfolios. We take multi-asset diversification a step further through the partnership we have with our fund manager partners – Goldman Sachs, Allianz, Threadneedle, Schroders, SEI, Close Brothers and 7IM. We take our partners’ multi-asset funds and combine them together to create greater diversification within our True Potential Portfolios.
Simple Diversification Multi-Asset Diversification Advanced Diversification
Diversification is becoming an increasingly important part of investing, especially in the current economic climate. The performance of our own True Potential Portfolios through Brexit has proven that not just multi- asset diversification, but advanced diversification can be more beneficial.
