Stock markets do not react well in times of uncertainty and the pandemic has piled pressure on financial markets worldwide. During periods of increased volatility, the importance of portfolio diversification, as a means of guarding against market turbulence, remains a constant investment principle.
It is advisable to revisit your investment objectives, review your long-term financial goals and reassess your attitude to risk, to ensure your current investment strategy provides sufficient protection from market volatility. Holding a diverse portfolio with a mix of investments suited to your particular risk appetite is key.
A balanced portfolio contains a combination of different asset classes, such as equities, bonds, property and cash. Each asset class has a different degree of risk; while equities have the potential to deliver higher returns than bonds, the latter can provide an element of capital preservation for times when you require a more risk-averse approach. Adopting portfolio diversification means you do not put all your eggs in one basket.
While building diversity into an investment portfolio is undoubtedly important, try to guard against over-diversification. If you hold too many assets, you run the risk of spreading your money too thinly and this could have a detrimental impact on potential returns.
Volatility will happen
The pandemic has rattled markets, but stock market volatility is normal and markets often rebound quickly once immediate issues are resolved. If you are investing for the long term, try to look beyond the short-term volatility. At the moment, it may be best policy to sit tight, but you should discuss your own specific circumstances with your adviser before taking any action.