The importance of diversification

We talk a lot about the importance of diversification and asset allocation with our clients at Informed Choice.

Spreading an investment portfolio across the different asset classes (cash, fixed interest, equities and property) is essential when creating a balanced portfolio to meet specific objectives.

No investor can accurately or consistently predict which investment asset class will perform best in a given year.

In some years, it might be Japanese equities. In others, UK corporate bonds might deliver the strongest performance.

Some new research from Barings has looked at the best and worst performing asset classes in each of the past five years.

They have highlighted that European equities were at the top of the 2012 list, but were one of the worst performing asset classes in 2011 and 2010.

In 2012, European equities returned 17.8%. They delivered -15.2% in 2011 and +5.3% in 2010.

Last year saw Overseas Bonds as the worst performing asset class in the study, returning -3.6%.

Because the best and worst asset classes tend to demonstrate sharp swings in each year, a multi-asset approach to investing makes real sense.

Making tactical adjustments to asset allocation positions each year, in order to reflect economic and market expectations, can still capture some additional value.

What really makes the difference is the ability to choose a suitable long-term (strategic) asset allocation model and stick with it over time.

Photo credit: Flickr/pernillarydmark