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Make sure your portfolio is really diversified

Monitor the correlations of assets to ensure that your portfolio is really diversified
Make sure your portfolio is really diversified

Stock markets surged in 2019 despite many investors feeling extremely cautious for much of the year, as evidenced by the net £2.3bn withdrawn from equity funds by UK investors in 2019, according to the Investment Association (IA). And – unusually – many safe haven assets, which should perform differently to equities, rose in tandem with stock markets. Defensive fixed-income securities such as government bonds and investment-grade credit performed strongly, in part due to investor caution, and UK investors put £11.6bn into bond funds on a net basis in 2019, according to the IA. The gold price also rose significantly, and funds such as DMS Charteris Gold and Precious Metals (GB00BYQ2JY43) and Ruffer Gold (GB00B8510Q93) made strong returns in 2019.

This scenario may be incredibly beneficial for equity investors and those with more diversified portfolios in the short term, but it should prompt concerns about correlations between asset classes. If safe havens move in the same direction as equities when markets are rising, it suggests that they could also fall together when conditions become more difficult. And equity markets face many challenges, for example the coronavirus is having an effect on markets and disrupting companies around the world such as Apple (AAPL:NSQ), which has recently warned that the outbreak will hit its revenues. Investor sentiment in Germany, meanwhile, has weakened following the outbreak and recent data suggests that Japan’s economy has been hit by a rise in the consumption tax.

So even if you are a long-term growth investor with a high risk appetite, you should still consider how closely your portfolio is linked to the ups and downs of equity markets, and how exactly you can achieve reliable diversification.

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