Diversification to manage volatility

One way to reduce investment risk is to diversify holdings, spreading your pension or investment portfolio across multiple investment asset classes.

New research from Baring Asset Management has found that 63.8% of pension professionals are seeking greater diversification of assets to navigate market volatility.

This is a significant increase to intended diversification levels over the past six months, when only 47.6% were using diversification as a key tactic for navigating market volatility.

Diversification works on the basis that some asset classes tend to be negatively correlated. When one type of investment is falling in value, another should be rising in value.

Investing in a well diversified portfolio is a key strategy to ensure risk and volatility are reduced, without significantly reducing the potential for investment returns over the longer term.

The correct mix of asset classes in an investment portfolio will of course depend on a number of factors; including the amount of risk an investor is prepared to take and what they need to achieve in order to meet their investment goals.

With the eurozone sovereign debt crisis continuing to rumble along, we expect to see continued market volatility for the rest of this year. Diversification across mainstream asset classes is a good way for most investors to handle this market volatility.

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