Diversification is part of investment risk management. By spreading funds over a wide variety of investment types within a portfolio, investors are able to dilute risk to any one investment and yield higher returns.
There have been many studies which demonstrate the effectiveness of this risk reduction technique. Maintaining a diverse portfolio neutralises the negative performance of some assets with positive performance in other areas.
Investment diversification is often carried out across asset classes, with calculated percentages of the portfolio to allocate to each. From stocks and bonds, real estate, to short-term investments, investors will diversify further, choosing asset classes which are separate enough to not share risk.
As one of the UK’s leading investment managers, LGIM offers knowledge and experience that can bring real benefit to investors looking to control risk in their portfolios, and achieve a smoother path to reaching their desired client outcomes.
Our approach to risk management is embedded in our portfolios’ asset allocation with the aim of being prepared for a wide range of market outcomes. This is achieved partly by holding some defensive assets, but predominantly by spreading risk across a wide range of asset classes.
Our Asset Allocation team includes dedicated and experienced economists, strategists and portfolios, who combine their expertise to deliver clear client outcomes such as growth and income via diversified portfolios. The team’s disciplined, objective driven approach means we manage the risks that matter to clients, while aiming to deliver long-term risk-adjusted returns that meet clients’ needs.
Short-cuts have their place. If you can avoid complexity and effort, it makes absolute sense to do so. It gives you time to work on other projects, or in my case re-watch The Treble (1999), reliving the good ol’ days. However, when it comes to retirement income, short cuts may be counter-productive and nowhere is this more apparent than with the 4% rule.
Correlations show us how assets have moved relative to each other in the past. As multi-asset investors, one of our key objectives is to identify assets that improve diversification. To do this, we try to combine assets with low or even negative correlations. This sounds easy, but can be surprisingly difficult in reality.