Daily, weekly or monthly fluctuation of your investment assets is not to be feared if you are a long term investor but it is important to take sensible steps to manage it. The most effective tool at your disposal is asset allocation and diversification.
Diversification is built on the observation that different assets perform differently even under the same conditions. Carefully blending assets with different characteristics can create a portfolio better able to withstand changing market and economic conditions.
Diversification is best achieved through asset allocation – how your investments are divided among various asset classes such as equities, fixed income and cash. Academic research suggests that the eventual investment outcome for a portfolio is significantly determined by the asset allocation chosen. Furthermore, by investing across a carefully chosen range of asset classes, you can lower the risk of your portfolio than if you had held just one asset class, like UK shares.
Asset allocation and diversification should be the framework upon which other investment decisions are made. Finally, it is important to remember there’s no such thing as the ‘best’ asset allocation – it all depends on what makes you comfortable and gives you the best chance at meeting your financial goals.
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