Diversify Or Die?

I know I bang this drum a lot but if you go all guns blazing in one area you might do really well, however that might be short lived.

Have you been investing in FTSE Trackers because they’re cheap? Cheap doesn’t mean good, it just means cheap! If you have other investments alongside your FTSE Tracker but that are negatively correlated to it, such as commercial property, it will help smooth out the ups and downs of the market. What about Government bonds or Corporate Bonds? They are negatively correlated to Commercial Property.

This comes down to a previous blog of mine about the need for risk in the first place. If you aim for the highest possible returns then you will definitely get big variations in value, we call it volatility. You could get an absolute loss or merely a catastrophic loss. You might also get very high returns and that will require you to time the market to get out, however as I have blogged about previously emotions get in the way of sensible timing, such as greed and fear, not to mention the knowledge required.

You could invest in a multi asset fund or a multi asset multi manager fund, this would give you the diversification that you need. The problem with this is that managers leave, die, get ill and funds close. The fund manager could have a losing streak or they take ever greater risks to cover an underperformance; big problem if you wanted to invest in a Cautious investment and the manager has changed the fund to mostly equities to pull back performance. This is why people use trackers in the first place, however it doesn’t mean that cheap is good. A Tracker is fine when markets are rising, but will follow the markets down whether you wanted them to or not when a correction occurs. Good fund management aims to deliver performance above such benchmarks and many do it consistently for many years, it takes good research to pick the winners from the losers and that doesn’t mean picking up an article written by a journalist.

So whether you prefer to use trackers or professional fund management, diversification is the key. The problem you will have now is that traditional diversification will cause you problems. Government Bonds have very poor income Yields and the risk has increased, as has High Yield and Corporate Bonds. Commercial Property has been doing well for some years with good rental yield, however with so many large retailers closing as well as home working and other risks things are not so clear in the future. Equities have suffered big falls across the world with big dividend payers such as Rolls Royce and Oil Producers suffering falls in profitability. The only thing that’s certain is that things are complex in the world of finance.

I am not advising you to use any products mentioned here, nor am I making a specific recommendation. The value of pensions and investments can fall as well as rise. You may get back less than you invested.

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