Diversifying your investments – why does it matter?

You might have heard the expression, ‘Don’t put all your eggs in one basket’, a million times. But following this advice can help your investments work better for you.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • Why putting all your money into one investment is generally a bad idea
  • How investing across different assets and geographical areas can protect your savings
  • Why investing in funds is a fast route to diversification.

Understanding investment risk

Listen to Savings and Investments Director, Clare Francis, explain why matching your investments to a risk level you’re comfortable with is important – and her tips on how you can do so. You can also find a guide to putting together a balanced portfolio of investments where you can help spread that risk.

Many people are put off from investing because they think it’s too risky.

But we take risks every day in life and often make conscious decisions about what we do and don’t do, depending on the chance of something going wrong or the potential reward we’ll get.

So rather than just ruling investing out because you think you might lose money, it’s worth taking some time to understand how likely that is and what you can do to take a level of risk you’re comfortable with.

There’s no getting away from the fact that you could lose money if you invest because stock markets fall as well as rise, but there are things you can do to reduce the chance of this happening.

And if you’re not too worried about risk and stock market movements you might be happy to take quite a lot of risk in the hope you’ll get better returns.

The key is investing in a way that you’re comfortable with.

So what are the main things to bear in mind?

Firstly, remember when it comes to where you keep your hard-earned money, there’s no escaping a degree of risk.

Even keeping it all in a cash savings account isn’t risk-free.

You won’t actually lose money, but its spending power can fall over time if the rate of inflation is higher than the rate of interest you earn.

Secondly, whatever level of risk you’re comfortable with, a diversified portfolio is what you should be aiming for.

If you only buy shares in a single company – which is what many people do, especially when they’re starting out – your returns are entirely dependent on the successes of that one company, which makes it a high-risk strategy to take.

A lower-risk approach is to invest in funds.

With a fund your money is pooled with that of other investors and then invested in a number of different companies, giving you that all-important diversification.

This doesn’t totally eradicate risk – but the diversification helps to spread it.

You can create a balanced, diversified portfolio by putting your money into funds that invest in different types of companies and different areas of the world.

That way they’ll all perform differently, so if some of your investments are struggling, you’ll hopefully have others that are doing well.

You don’t need to pick a large number of funds at the outset – you can build your portfolio of investments over time.

One year you might choose a UK fund where your money is invested in a collection of UK companies.

The year after you might go for a European fund, US fund, a global fund, or one that invests in Emerging Markets and so on.

You can also invest in funds which focus on specialised sectors, such as technology or healthcare.

Once you’re ready to look at investment options, we offer different ways to invest which allow you to be as hands-on or as hands-off as you like.

Barclays Ready-made Investments (RMI) is a range of diversified funds that invest in different types of assets – shares, bonds, and cash – and different regions.

All you need to do is select the level of risk you are most comfortable with.

If you’re new to investing, these funds can be great as they offer a simple way of getting started and provide you with immediate diversification.

They’re not only for first-timers though – Ready-made Investments are also useful if you’re short on time or would prefer to leave the task of selecting funds to the professionals.

If you prefer to select own investments though, the Barclays Funds List is a great option.

Our list is made up of several funds from each of the investment sectors we believe are key for building a diversified portfolio.

There’s plenty of information on each fund and its objectives – what it is and what it aims to do.

So, whether you want to do it yourself or leave it to the experts, there’s hopefully a solution to suit you.

The key is to decide how much risk you’re comfortable with before you start.

One of the important principles of investing is to spread your money across a range of different asset classes. This approach means that if one or more of your investments rise, you will benefit, but, if they fall, there should be some protection because, hopefully, some of your other holdings in different asset classes will be going up in value. However, diversifying doesn’t mean shortening the period of time you invest over. You should be thinking long term (at least five years) for all your investment allocations.

What does diversification mean?

Diversification means making sure you’re not relying on one type of investment too heavily. This helps to protect your investments and reduce the overall risk of losing money.

There are four main asset classes – cash, fixed-interest securities, property, and equities – and having exposure to them all will help reduce the overall level of risk of your investment portfolio. If one part of your portfolio isn’t doing well, the other investments you’ve made elsewhere should compensate for those losses.

It can work on so many levels

Investing in just one company is extremely risky, because if it doesn’t perform well, you’ll lose money. Investing in lots of companies means that even if one does badly, others may do well, which will limit your losses.

You can further diversify your portfolio by spreading your investments over several geographical areas. If you invest in companies from different countries then even if, say, manufacturing is performing poorly in the UK, it might be flourishing in another region. You can take this up another level by investing in different sectors. Therefore, if manufacturing underperforms in several countries at once, other sectors you’re investing in could be outperforming their markets.

Make sure you are comfortable with the risks involved when investing in different regions. For example, emerging markets such as Brazil, Russia, India and China are likely to be riskier than developed markets such as the UK and US.

Funds – diversification made easy

You can gain access to several different asset classes and geographical areas through managed funds, such as unit trusts, open-ended investment companies (OEICs) and investment trusts.

These are collective investments, where your money is invested with other investors in a range of different holdings. Some funds focus on a specific area, type of investment or sector, while others are more general and invest across several regions and sectors.

Fund managers publish information about the underlying asset allocation of a fund, so make sure you look at this before investing.

Find out more about funds

Thinking about risk and return

Diversification won’t stop you experiencing losses, but it can help you spread your overall risk. Do remember, though, that you can’t get rid of risk completely. Any investment can go up or down in value and you could make or lose money. You should find a spread of investments and a level of risk and return that you’re comfortable with.

Assets like bonds and gilts can help offset riskier investments like shares, but the downside is they don't offer the same potential for higher returns. Cash investments are also less risky than shares, but if the cost of living rises more than the rate of any interest you're getting, your money could fall in 'real' value over time.

The investments you pick for your portfolio will depend on how long you plan to invest (which should be for at least a five-year term), how much risk you’re happy to take and your financial objectives. If you’re not sure which investments to choose, seek independent financial advice.

No matter what approach you take to diversification, you might still get back less than you invest.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

You may also be interested in

The value of investments can fall as well as rise. You may get back less than you invest.

Reducing unnecessary risk

You need to decide how much risk you’re willing to take when you invest. This will largely depend on your financial goals, how prepared you are to accept losses, and how soon you need your money. In this section, we'll help you understand how to manage risk when investing.

Principles of investing

If you’re new to investing, knowing where to start can be a daunting task. Here, we guide you through your investment journey, from what to consider before you start, the different types of investment account, which might suit you, and the various asset classes. You’ll also learn why it’s important to focus on the long-term as an investor, and create a diversified portfolio which includes a range of different investments.