Spreading your money between different kinds of investments
Diversification, the spreading of your money between different kinds of investments (‘asset classes’) and different kinds of investment product, helps reduce the risk of your overall investments (referred to as your ‘portfolio’) under-performing or losing money.
Protection for your money
Cash you put into UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation Scheme (FSCS).
The FSCS savings protection limit is £75,000 (or £150,000 for joint accounts) per authorised firm. It is worth noting that some banking brands are part of the same authorised firm. If you have more than the limit within the same bank, or authorised firm, it’s a good idea to move the excess to make sure your money is protected.
Each kind of asset behaves differently. For example, when stock prices fall, the prices of fixed interest securities may go up. If you have a mix of investments in your portfolio, it will minimise the risk that they’ll all lose value at the same time.
Diversifying within an asset class
There are many opportunities for diversification, even within a single kind of investment.
For example, with shares, you can spread your investments between:
- The UK and overseas markets
- Different sectors (industrials, financials, oils, etc.)
- Large and small companies
Do you need to improve your diversification?
If all your cash is in a single savings account, you should think about spreading it between an instant access savings account and other alternatives, like cash bonds or an investment fund. You should also think about moving some of it where your cash within one particular UK bank or building society exceeds the FSCS protection limit of £75,000.
Consider if you have access to more than six months’ worth of living expenses putting some of that excess into investments like shares and fixed interest securities, especially if you’re looking to invest your money for at least five years and are unlikely to require access to your capital during that time.
Also, if you’re heavily invested in a single company’s shares – perhaps your employer – start looking for ways to add diversification to your exposure.
Multi-asset funds
Multi-asset or mixed investment funds invest in a range of assets, typically shares, bonds and cash, with the allocation between the different types of assets left to the discretion of the fund manager. The fund manager will aim to build a portfolio with a mix of assets that is consistent with an investor’s identified risk objective.
They are typically designed for investors with different risk appetites, for example, Cautious, Balanced and Adventurous. For those with smaller amounts of money to invest, or who do not have the time or expertise to structure their own portfolio, multi-asset funds may be an attractive option.
Investing in only a single type of asset, such as shares or bonds, can mean the value of your investment goes up and down more than if you spread your risk by investing in several types of assets. Multi-asset funds offer investors a portfolio with a spread of assets within a single fund.
Although multi-asset funds aim to spread risk across different types of assets, your capital is still at risk. The value of your investment may go down as well as up and you may not get back the money you invested.
Some types of multi-asset funds buy and sell investments more often than other types of fund, which will cost the fund more in dealing fees. Multi-asset funds may typically be offered through an Individual Savings Account (ISA) or as a default choice in a pension, or directly through a fund manager.
