Over the last few weeks, we have looked at the value of long term investment and how having a diverse portfolio can help. This week we explain exactly what a diverse portfolio is and how it affects your finances during times of uncertainty.
How is a portfolio built?
You will have heard your adviser often talk about your investment portfolio. A portfolio is the collection of different investments; it’s how your pot of money is spread out across investments such as stocks, bonds or real estate. As soon as you own more than one investment, you have a portfolio.
It’s important to understand that the investments within your portfolio can sometimes interact with each other. For example, if the price of flour moves up and down in exactly the same way as bread, they are 100% correlated. If prices never move in the same way, they are 0% correlated. Understanding how your different investments interact is part of how your advisers build your portfolio—considering not only the potential returns of an investment but how those returns may be linked.
Making a portfolio diverse
Making a portfolio diverse isn’t as simple as it seems. The way that investments are connected is complex and finding truly uncorrelated investments isn’t easy. By making a portfolio diverse, you are making sure that your overall portfolio suffers from fewer and shallower drops in overall value. Having a balanced portfolio means that losses in one investment can be offset by gains in others.
What it means for your portfolio during Covid-19
Over the last few months, we have seen the longest global economic expansion come to an abrupt end, caused undeniably by coronavirus Covid-19 spreading rapidly around the world.
Having a diverse portfolio that is designed to be balanced makes those drops shallower. As an example, payment companies like Visa and Mastercard, Amazon and even supermarkets have been performing well during the outbreak.
We live in historic times, and it would be foolish to assume that we will return within a matter of weeks or months to the way that we were. However, history tells us that good assets, good companies, and good funds will come through this and will be in a position to fully capitalise on the recovery in the days and months to come.