The pandemic has placed immense pressure on financial markets across the globe. Markets hate uncertainty and, in recent months, that has been one commodity not in short supply. Heightened volatility, however, does always demonstrate one investment certainty – the importance of portfolio diversification as a means of guarding against market turbulence.
Time to take stock
In uncertain times like these, it’s always good to revisit your investment objectives and review your long-term financial goals. In particular, it’s worth considering your attitude to risk and whether your current strategy provides sufficient protection to your portfolio. The key is generally to ensure you hold a diverse portfolio with a mix of investments suited to your particular risk appetite.
Benefits of diversification
A balanced portfolio is generally one containing a combination of asset classes, which typically includes equities, bonds, property and cash. Each of these provides differing degrees of risk. So, while equities have the potential to deliver higher returns than bonds, the latter can provide an element of capital preservation when investors turn anxious and become risk averse. Adopting a diversification strategy essentially ensures investors do not put all their eggs in one basket.
While building diversity into an investment portfolio is undoubtedly important, investors must also guard against over-diversification. This is because holding too many assets can spread your money too thinly and thereby have a detrimental impact on potential returns.
The coronavirus outbreak has also highlighted another key lesson for investors: acceptance of market volatility. Most people invest for the long term and so need to look beyond short-term volatility. As a result, investors’ best policy at the moment might simply be to sit tight, if advised to do so in their specific circumstances.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.