The Power of Diversification!

The importance of investing in a diversified portfolio.

The recent market fallout has shown us all that investing in the worlds stock markets can be set with some large risks.

Many UK investors may consider that it is better for them to have a ‘local’ approach to their investments; with a greater proportion being held in the UK.

In fact the evidence is that many UK ‘Managed’ funds invest their assets disproportionately in the UK.

For example the Legal and General Managed Fund invests 55% of its assets in company shares. Of that, 25% or over 45% of the total investment in equities, is invested in the UK market.

When the UK market  was worth $3.6T compared to the world total of $69T, this seems to be a large bet that the UK stock Market will out perform the rest of the worlds.

Even when currency risk is taken into account, it seems a little at odds to sway a portfolio to such a large extent when global growth comes from many different areas and exposure to all of these is better than an exposure to one to such a great degree.

The slide shows the recent performance of a number of markets and when compared to the UK FTSE 100. Many ‘managed funds’ may be invested in the FTSE 100 and this graph shows the additional risk of investing disproportionately in one economic area or sector over another. We believe that an equity exposure should be to the worlds economies, by exposure to global stock markets. This thereby provides the potential growth from all markets, whilst spreading the risk of underperformance across a wide band of markets