How to build a diversified portfolio

Building a diversified investment portfolio can help mitigate the impact of market falls on your hard-earned wealth.

In its simplest form, diversification means spreading your money across different asset classes, sectors, regions and countries. But you also need to ensure your portfolio suits your unique circumstances, including your goals and investment timeframe.

 
Here are some considerations to get started.

The basics

Before you can begin constructing your portfolio, you need to think about your goals and attitude to investment risk.

In general, the longer you are investing for, the more risk you can afford to take on. This is because a long-term investment horizon gives you more time to make up for any losses during turbulent periods. The last thing you want is for your investments to fall in value just before you need to withdraw the money.

If you are approaching or in retirement, you might lean towards safer investments like cash and fixed interest investments. In contrast, younger investors with a long investment timeframe might choose to put a bigger chunk of their money in equities.

Building a portfolio

Here are some important considerations when building your portfolio:

• Think about your goals and whether you are saving for the short, medium or long term. Ideally, you should invest for at least five to ten years.
• Accept that the value of any investments can fall as well as rise. Investing carries risk, but equities have typically outperformed cash over the long term.
• Make sure your investments are in line with your attitude to risk, and that you don’t invest more than you can afford to lose.

Diversifying your investments

Whatever your approach to risk, it is wise to ensure you are not relying on one type of investment for returns within your portfolio. This means spreading your money across a range of asset classes, including cash, fixed-interest investments such as corporate bonds and gilts, and equities.

Some asset classes are ‘negatively correlated’, which means they tend to react differently to economic shocks. If one part of your portfolio isn’t performing well during current circumstances, the other investments might compensate for losses and smooth overall performance.

Broadening your approach

Even within different asset classes, you can still look at diversifying further, such as by including international exposure or investing in different sectors.

If you are seeking income from your investments, you can also broaden your search. Historically, fixed interest has been favoured for income, but investors can also look to property, infrastructure, and some private equity firms.

Of course, there are no guarantees of returns wherever or whenever you invest. However, over time, a balanced, broadly diversified portfolio should be well-placed to weather storms.

Next steps

Building a diversified and robust investment portfolio that suits your individual circumstances can seem a daunting prospect, and that’s where getting some financial advice can help.

A financial adviser can structure a balanced portfolio tailored to your individual needs, whether you want to grow your money over time, or produce an income. They can also rebalance your portfolio to ensure that it continues to reflect your needs over the longer term. This will give you the confidence that your money is working as hard as it should be without being exposed to undue risk. Let’s work together and build a plan that helps you achieve your goals and realise your ideas.

The value of investments, and any income from them, can fall and you may get back less than you invested. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy.