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Diversification – a Crucial Rule of Life


Last year Neil Woodford, the rock-star “stock-picking” fund manager of the last decade or so was relieved of his flagship fund and suffered the ignominy of watching its liquidation. For many years Woodford produced stunning investment returns as he enjoyed startling success in selecting companies in which to invest.

As a valued client of ours you will know full well that our philosophy of diversification precluded us from investing in Woodford’s funds for many years – although we have sometimes watched and wished we had been able to participate in the rich rewards enjoyed (for a season).

At the core of our investment process is the diversification of investment portfolios between different types of investment (asset classes as they are known). In fact, interestingly, the combination of asset classes has a greater impact on the returns of your portfolio than the choice of the individual shares. In other words, deciding how much to invest in shares is more important than choosing which shares.

The main two asset classes are shares and bonds (higher risk and lower risk respectively). But we also consider property and cash. When these (and other) asset classes are correctly mixed and matched to your risk tolerance we have confidence to say that, although your returns may lag behind a rock-star fund manager for a few years, your fund will never be liquidated because some underlying investments have failed!

Previous articles have commented on the kind of advice we give in such uncertain times as the present (March 2020). Boringly, diversification, a rule for life in the best times, becomes crucial in the worst times. Political uncertainty leads to economic uncertainty which leads to financial uncertainty. So it is more important than ever for your portfolios to be placed in an extensive range of different assets and underlying investments. Which is what we do.


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