Investments | 20 February 2023
the benefits of wealth diversification
Diversification could help you manage your wealth goals across all your assets.
For an investor, a typical diversified portfolio is often seen as simply equities and bonds. This is because, historically, if equity markets underperform, then the relative safety of bonds – owning government debt – could offset this with an increase in value.
This was seen in early 2022. When equity markets dropped following Russia’s invasion of Ukraine, bonds rallied. However, it’s no secret that, overall, 2022 was a tough year for both bonds and equities.
It’s important therefore to understand everything that prudent investment diversification takes into account. It’s not just about the different asset classes of bonds and equities, but also how those asset classes are broken down across variables such as regions and industrial sectors. By including different stock indices from different regions and sectors around the world in a diversified portfolio, you could reduce your exposure to any concentrated risks while taking advantage of areas that may perform well.
Diversified bonds can also mitigate risk. In 2022, Coutts diversified their bond holdings so they held a smaller concentration of UK bonds, or ‘gilts,’ for clients and more international bonds via a G7 basket. This helped minimise the worst of the losses when UK gilts dropped in late 2022.
Sectors and regions
There are other ways Coutts can give clients measured exposure for potential gains while managing risk through diversification.
For example, by investing in an Asian emerging markets fund with some exposure to China, Coutts hope to benefit from the growth of the Chinese economy while not being overexposed to the risks involved in Beijing’s lack of transparency around state control and business.
Diversification and risk
Diversification could also help you identify where you may want to license more risk for the potential of higher returns. This is of course dependent on individual circumstances and goals, and diversification could be key to helping you understand what these might be, says Coutts Wealth Manager Myles Finnegan.
“We try to build it from the ground up with clients,” he says. “So we cover what they need for their cash flow and what they need for their family, and how diversification could help them manage risk. Once you’ve got that then you can take on riskier projects because you’ve diversified your risk appetite too.”
The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.