14 October 2011

Investment Diversity - What Works?

When reviewing an investment portfolio it's always tempting to look short term. You could research how a particular fund (or share) has performed over the last 6 or 12 months, look at how its asset class (equities, fixed interest, ...) is likely to perform in the near future and then make decisions on that basis.
If you take that approach to its logical conclusion you will end up with one investment in your portfolio which you regularly change to chase performance. There's no doubt about it... that approach doesn't work. Doing that you would be missing out on the main benefit of a diversified portfolio.

But the downside of diversification is that you are always likely to have some of your investments performing poorly. At least, it will feel like they are performing poorly - until you remember that you cannot judge performance over the short term (I'm assuming you are a long-term investor here). And since no-one has succeeded in predicting which types of investment are going to perform the best over the next period of time, that means those investments are positioned to take advantage of the next change in investment fortunes.

Of course, you still need to ensure that your choice of investment (unit trust fund, investment trust fund, share, ...) is fundamentally sound - there is no point in picking an investment which has never performed well and expecting it to give you significant growth at some point in the future, just because it never has in the past.

So if you (or your adviser) have made good decisions in the past, don't be hasty to undo that, even if values are going down. Check that nothing fundamental has changed (like investment mandate or fund manager) and then put the lid back on and leave it to cook a bit longer!

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