Diversification – through asset allocation
The investment solution we recommend will be based upon an asset allocation “blueprint” relevant to your Investor Risk Profile.
‘Asset allocation’ involves designing the right balance of assets held within an investment solution.
The recognised asset classes (once again – cash, equities, gilts and property) can respond differently to the same prevailing investment market conditions. Asset classes expected to respond very similarly to each other are said to be highly “correlated”.
Diversification within a portfolio across assets that tend to behave in different ways can help protect it against market fluctuations, whilst providing the potential for rewarding returns.
Therefore, it is important to design a blend of assets which have: –
- appealing long term risk/return characteristics and
- relatively low correlation with each other
This way, if one asset class falls at any point, there is a reasonable chance that the other may not, thus providing some protection and reducing volatility of returns for the portfolio.
Volatility can be unsettling and therefore reducing that volatility gives a greater likelihood that, as an investor you can stick to your long term strategy and realise your ultimate goals.