Investing can at times seem overwhelming, but it can be broken down into 5 simple, key concepts. In investing just as in all of life, it is the simplest things that consistently work.
2. Dissimilar price movement diversification enhances return
A landmark academic discovery found that when 2 portfolios have the same arithmetic average return, the portfolio with smaller up and down swings in value (less volatility) has a greater compound return.
3. Employ asset class investing
Most investors who understand the concepts of diversification use actively managed funds, which basically involve market timing, stock selection or a combination of both. The common link between these strategies is that they involve subjective forecasting, and the likelihood of human error that accompanies it. There is no available evidence to justify active management, and we do not recommend actively managed funds for any of our customers.
4. Global diversification reduces risk further
Domestic and international stock markets have a dissimilar price movement, and historically we can see long periods where the UK equity market outperforms or underperforms international markets. You can reduce risk by allocating a portion of your portfolio to international stocks which can both lower risk and increase the expected return of your portfolio.
