Diversification: How to manage investing risk
Most of us know the old saying about not putting all your eggs in one basket. It’s good advice in life, and it’s essential in investing. Because while markets can be unpredictable, diversification gives your portfolio the balance it needs to weather ups and downs – without sacrificing long-term growth.
What is diversification?
Simply put, diversification is spreading your money across different investments so you’re not relying too much on any one thing. That can mean holding shares in different companies, but also across different sectors, regions, and even investment styles.
It’s a really important part of managing risk. By diversifying, you reduce the chance that one badly performing investment drags down your whole portfolio. At the same time, you keep the potential to capture growth from areas that are performing well.
Think of it as building a team. You wouldn’t put all your faith in one star player— you’d want a mix of skills, strengths, and perspectives working together. The same principle applies to investing.
Why is diversification important?
Think of your portfolio a bit like a see-saw. Diversification aims to keep things even, so you don’t have to come down to earth with a thump.
On one side of the see-saw, you might hold shares in a fast-growing technology company. On the other, you might own shares in a more defensive utility business. If technology shares stumble, utilities may hold steady or even rise. This helps keep your overall portfolio in balance.
That balancing effect is especially important when markets turn volatile. A diversified portfolio can help smooth out the bumps, making it easier to stay invested for the long term. Without that balance, it’s tempting to panic-sell when prices fall – often locking in losses and missing the recovery that follows.
Diversification doesn’t eliminate risk entirely, but it helps ensure you’re not overexposed to any single company, sector, or region. It’s one of the simplest, yet most powerful, tools to help investors find their comfort zone.
Top tips for diversification
So, how can you build diversification into your own portfolio? Here are a few guiding principles:
- Choose a well-balanced portfolio. Look for a spread of investments that can perform in different environments, so you’re not leaning too heavily on one type of asset.
- Think globally. Investing in equities from a variety of industries and regions means your portfolio isn’t tied to the fortunes of a single country or sector. For example, European healthcare firms may perform differently from US technology companies or Asian consumer businesses.
- Mix investment styles. Some fund managers focus on companies that generate steady income, while others look for faster growth. Combining these styles can add resilience, as income strategies may perform better in certain markets while growth takes the lead in others.
- Beware of chasing trends. It’s tempting to go all in on the latest popular theme, whether that’s renewable energy, artificial intelligence, or cryptocurrencies. But concentrating too heavily in one area leaves you vulnerable if the trend reverses.
- True diversification can be tricky to achieve on your own. It takes extensive market research, experience and access. This is where investment trusts can be especially helpful, as they’re both professionally managed and diversified by design.
The bottom line
Diversification doesn’t just protect against risks. It also positions your portfolio to benefit from opportunities wherever they arise. By holding a thoughtful mix of investments, you’re less dependent on predicting what’s going to happen next in the markets.
It’s a strategy that helps investors stay invested, worry less about short-term swings, and remain focused on long-term growth.
At Alliance Witan, diversification is built into everything we do. Our portfolios are spread across sectors, regions, and investment styles, giving you access to a carefully balanced approach that aims to deliver consistent long-term returns without huge highs and lows.
Worried about volatility?
Market ups and downs can feel a little unsettling, but they’re often a normal and expected part of investing.
Finding your comfort zone
We use diversification - and a range of other strategies - to spread risk and track down new opportunities.
Issued by Towers Watson Investment Management Limited (TWIM), registered office Watson House, London Road, Reigate, Surrey RH2 9PQ. TWIM is authorised and regulated by the Financial Conduct Authority, firm reference number 446740. TWIM is the Alternative Investment Fund Manager (AIFM) for Alliance Witan PLC. TWIM is part of Willis Towers Watson.
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