The Benefits Of Taking A Diversified Investment Approach

Just because something is a good idea today, doesn’t mean it will be tomorrow. Investing in just one area can potentially lead to big problems. There are two types of risk to consider when investing:

 

  • Systematic risk, also known as market risk or undiversifiable risk, is the risk inherent to the entire market or market segment. This is because an event such as the current pandemic has an effect directly on the entire market.

 

  • Unsystematic risk, is something that can effect a single company or an entire sector. Unsystematic risk can be offset by investing in a number of holdings across different sectors that perform differently during varying market conditions.

 

The chart below shows the annual returns for selected asset classes ranked from best to worst within each calendar year over the last 10-years:

Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, 1 March 2021 – https://www.blackrock.com/corporate/insights/blackrock-investment-institute/interactive-charts/return-map

 

The chart shows that when it comes to picking asset classes (the different types of investments you could put your money into) it is almost impossible to predict a winner. You can see how no individual asset class consistently outperforms the others.

 

If we compare picking the right assets to the management of a football team for a moment. You will never get anywhere picking 11 strikers or conversely 11 defenders, even if they were amazing players in their own right. To have a well-rounded team you need players who can score for your team but also keep it out of the goal at the other end with a range of other players there to support along the way.

 

Therefore, the best approach is to ensure you are invested across a wide range of asset classes, sectors and geographical locations so that each part of your portfolio can work in conjunction in a variety of scenarios to mitigate the controllable unsystematic risk element of your investments.

You can complete an Investment application here 

Should you wish to speak to an Independent Financial Adviser, visit www.bee-sure.co.uk or for more information on Saving & Investments Click Here or Contact Us for a free consultation with Steve.

 

Written by Steve Tutton DipPFS, IFA at Beesure Ltd

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