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How diversification fails

For years, it has been easy for investors to make good safe returns on a balanced portfolio. This might be about to change.
How diversification fails

Something unusual has happened so far this year which might be a worrying portent of things to come: many well-diversified portfolios have lost money.

According to Trustnet a quarter of unit trusts in the mixed investment sector with 20-60 per cent in equities have lost money so far this year and a further 35 per cent have made less than 1 per cent. This is because losses on bonds and gold have offset modest gains in equities.

I say this is unusual because for years diversification has been easy. My chart shows the point. It shows annual returns on a portfolio comprising 50 per cent global equities, 20 per cent gilts and 10 per cent each in gold, sterling cash and US dollar cash. It has only rarely lost money, losing less than 10 per cent during the worst of the 2008 crisis and holding up well during last year’s slump in equities.

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