We all know that investments can go up or down in value and this has been brought home to investors in recent weeks as the BREXIT negotiations continue apace.
This fluctuation in value is the inherent risk of investing and the extent of the risk is often measured by how dramatic the movements (up or down) are. This is known as volatility and can be unsettling, even for the most experienced of investors.
You may well be asking yourself ‘what can I do to protect the value of my investments?’
The bad news is that you cannot escape market volatility if you have chosen to invest some of your savings or an inheritance in the stock market. However, the mix of investments you hold can help to mitigate the effect of volatility to a certain extent as not all assets will respond in the same way to the same market event.
The graph below shows how different investment types (classes) have performed year on year since 2002 and you will see that the best performing class of assets changes almost every year. Without a crystal ball it is impossible to predict which investments will provide a positive return at any given time.
By building a portfolio which has a mix of different investment classes you can potentially smooth out some of the volatility in your portfolio – the benefits of diversification.
A more simple explanation of how diversification can help smooth out volatility is to compare the fortunes of an ice-cream seller and a manufacturer of umbrellas.
When it’s raining you would expect the umbrella company to do well and when it’s sunny, the ice cream company will be putting out the bunting.
If we relate this to the pictograph above the black line would represent the individual fortunes of the umbrella company or ice-cream company where we would expect the share price of each company to be influenced by the weather and demand for their particular products. By investing in both companies you smooth out the performance of your portfolio and have a less volatile investment experience (the purple line).
The Value of Financial Advice
In our view, it is important to take advice from someone who is not dependent on investing your money to earn their fee. Surely it makes sense to take advice from someone who is paid to provide you with specific financial planning, rather than for just investing your money.
If you’d like to speak to such a person, we can steer you in the right direction because over the years we have developed trusted relationships with other industry experts - including financial advisers.
☎ Or call on 0800 011 9705
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