5. Diversification matters

Don't put all your eggs in one basket

Diversification is defined as investing in multiple and different kinds of assets so that your exposure to each one is limited. Investors should view risk in the context of their overall investment portfolio, rather than the portfolio's individual components. In a diversified portfolio, if individual investments perform poorly, their impact on the whole portfolio is moderated and won't dictate its growth trajectory. Meanwhile, standout stocks will contribute to performance rather than drive it entirely.

A diversified portfolio can be more resilient to sudden market movements than one that is concentrated in one asset class, country or sector. A portfolio entirely invested in airline stocks, for example, will be severely affected by unexpected restrictions to international travel.

Equities

Equities form the bedrock of many investment portfolios, particularly those with higher risk profiles. Equities represent partial ownership of a company (hence 'shares'), and if the company grows, your shares can grow over time. Companies are also connected to and affected by what is going on in the wider world, so the value of their shares can fluctuate in the short term. Over the long term however, historic data supports that equities overall tend to rise in value, benefiting patient investors. Many companies also pay dividends to shareholders, which can contribute to overall investment return.

Bonds

Bonds, meanwhile, tend to feature more heavily in portfolios with lower risk appetite. Bonds are a form of debt and are 'issued' by companies and governments around the world. This means the company or government is asking to borrow from investors, usually for a fixed term.

Bonds typically pay a return to investors in the form of coupons (interest payments), until such time as the bond 'matures' and the sum initially borrowed from the investors is returned. Because bonds should represent a predictable flow of returns, they are often considered to be lower risk than equities. Historically, bonds have returned less than equities over the long term. 

Developed and emerging markets

Investing across different geographies can provide added diversification. Developed markets such as the US and UK host some of the world’s biggest companies, in well-regulated regimes that support investor confidence.

Emerging markets are riskier than developed markets because they can experience political instability, illiquidity and currency volatility, and a high level of state-owned or state-run enterprise. To compensate for these risks, emerging markets investors tend to demand a higher level of return. Emerging markets include China, India, parts of Eastern Europe, Latin America, South America, and the Middle East.

An efficient way to achieve diversification is through exchange-traded funds (ETFs), such as those used by our investment team. ETFs are essentially a basket of securities. They are an easy, versatile way to gain access to multiple equities and bonds without having to buy each one individually. Our experts build and monitor a range of portfolios that are designed with diversification in mind. We invest in ETFs, some of which track an entire index or market, investing across a large pool of investments without buying each one individually. This approach helps to shield portfolios from sudden falls in markets or individual stocks.

The importance of rebalancing

Left unsupervised, an investment portfolio can eventually morph into something that doesn’t suit the investor.

Over time, portfolios can tilt away from investment objectives as certain investments can rise in value while others fall. This changes the composition of the portfolio, which can alter its level of risk. Eventually, your portfolio may come to be dominated by higher-performing, riskier assets, which may not suit your risk appetite.

Portfolios therefore may need to be rebalanced to reflect the investor’s objectives and risk tolerance. This can be a complex and time-consuming endeavour. Our clients benefit from our investment team, who are there to keep track of their portfolios and rebalance investments on their behalf. For our Fully Managed, Thematic Investing, Socially Responsible Investing, Smart Alpha: Powered by J.P. Morgan Asset Management and Income Investing portfolios this is done on a regular basis via the daily monitoring of market and economic data. For our Fixed Allocation portfolios this is done once a year.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Tax rules vary by individual status and may change. Pension, ISA, JISA and LISA eligibility rules apply. With LISAs, govt withdrawal charges may apply. 

Nutmeg does not provide tax advice. For personalised advice tailored to your specific situation please consult with a qualified tax adviser or financial planner. If you are unsure if a pension is right for you, please seek financial advice.

Nutmeg provides 'restricted advice', which means we will only make investment recommendations on the products and services that we offer.