Diversification in Asset Management
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Most studies of investors have concluded that people are more concerned about high losses in the bad times than they are with making high gains in the good times. Therefore, most wealth managers are talking to clients about diversification as a way of taking the edge of any market corrections. Some assets are highly correlated and move in similar ways according to different market conditions. Obviously, an investor investing in shares in four banks is only slightly more diversified than an investor with shares in one bank. So, even for an investor holding just shares, the first step is to invest in a spread of different companies. Opinions differ, but 20-30 or more shares are suggested as a minimum number to obtain some degree of spread.
The type of asset that could be included in a portfolio for a wealth investor is indeed diverse and no doubt this will serve as an introduction for some readers to some investment areas they had never previously considered. The spread of assets is an important area. There are still some very respectable investment groups that asset-allocate only into shares and fixed interest securities. Whilst this may provide a better spread than just using a single asset class, it is hardly a diversified portfolio. For some investors, even when investing in collective investment companies as unit trusts, investment trusts or open-ended investment companies which are typically suitable for portfolios up to the quarter million pound mark will try to spread their risk over a series of different asset classes such as fixed interest securities, equity funds both in the UK and abroad, Real Estate Investment Trusts (REITs) and commodity-based funds.
Investing overseas will help, as different countries have different economic cycles and, indeed, currencies, but with the advent of globalisation many markets will move in similar ways. To obtain real benefits from diversification, completely different types of assets should be chosen where historically their movements have not been correlated or which show some negative correlation.; for example, where share markets go down, fixed interest markets usually go up. The wider the spread of uncorrelated assets the more robust will be the performance in different economic conditions.
Alternative assets can also provide a comprehensive level of diversification. In the past, alternative asset investments have been almost exclusively for high net worth investors, these assets' illiquid secondary markets and high minimum investment sizes serve as a deterrent to participation by a broader retail market. However, with the constant and rapid development of global financial markets in recent years, continuing to provide an ever-greater number and depth of products through which more investors can add alternative assets to their portfolios - the benefits are now available to a much wider and diverse range of investors.
The type of asset that could be included in a portfolio for a wealth investor is indeed diverse and no doubt this will serve as an introduction for some readers to some investment areas they had never previously considered. The spread of assets is an important area. There are still some very respectable investment groups that asset-allocate only into shares and fixed interest securities. Whilst this may provide a better spread than just using a single asset class, it is hardly a diversified portfolio. For some investors, even when investing in collective investment companies as unit trusts, investment trusts or open-ended investment companies which are typically suitable for portfolios up to the quarter million pound mark will try to spread their risk over a series of different asset classes such as fixed interest securities, equity funds both in the UK and abroad, Real Estate Investment Trusts (REITs) and commodity-based funds.
Investing overseas will help, as different countries have different economic cycles and, indeed, currencies, but with the advent of globalisation many markets will move in similar ways. To obtain real benefits from diversification, completely different types of assets should be chosen where historically their movements have not been correlated or which show some negative correlation.; for example, where share markets go down, fixed interest markets usually go up. The wider the spread of uncorrelated assets the more robust will be the performance in different economic conditions.
Alternative assets can also provide a comprehensive level of diversification. In the past, alternative asset investments have been almost exclusively for high net worth investors, these assets' illiquid secondary markets and high minimum investment sizes serve as a deterrent to participation by a broader retail market. However, with the constant and rapid development of global financial markets in recent years, continuing to provide an ever-greater number and depth of products through which more investors can add alternative assets to their portfolios - the benefits are now available to a much wider and diverse range of investors.
