Diversification

What is diversification?

Diversification is the process of allocating investments across a variety of assets to manage risk and reduce reliance on any single investment. It is a key principle of portfolio construction, helping to smooth returns and provide a buffer against market volatility.

Rationale and application

By spreading capital across different assets, investors can reduce the negative impact of any underperforming investment. Asset allocation is essential to creating a resilient and well-balanced portfolio that can withstand economic shocks and deliver more stable returns over time.

Diversification can be achieved by investing across multiple asset classes, such as equities, bonds, property, and private equity, as well as across sectors and global regions.

There is growing recognition that public markets alone may not be sufficient to meet long-term growth and diversification objectives. Increasing allocations to private markets offers exposure to assets that are less correlated with public equities, helping to build more robust portfolios.

While diversification offers several benefits, it also presents challenges. These include potentially limiting short-term upside, requiring greater effort to manage, and increasing complexity for less experienced investors. Maintaining a clear and consistent strategy across diverse investments is also essential.