02: Portfolio diversification

If history can be relied upon, equities are likely to outperform other asset classes in the long term. Over the shorter term, however, they are capable of extreme volatility, so it is important also to invest in other assets like commercial property, commodities, government gilts and corporate bonds.

Although these other asset classes may not produce such attractive long-term returns as equities, the fact that their prices move independently of the stock market can help to ensure that your portfolio maintains an element of resilience during bear markets.

It is also vital to have diversification within the equity element of your portfolio, achieving a suitable balance between large, small and medium-sized companies and between different geographical areas.

One particularly common mistake made by inexperienced investors is to allocate most of their money to the UK, which only accounts for around 9% of the total value of world stock markets. It is important to achieve exposure to other major markets such as Europe, the US and Japan and possibly also to emerging markets like China, India and Brazil.Last Updated