Why Diversification is Important in a Portfolio

A diverse investment portfolio is no longer a guarantee of safety in a falling market, reports Reuters.

The newswire explains that, since 2002, many investors have looked to spread their funds across different asset classes.

Should one fall, the theory is that any losses will be minimised as the other assets should help to balance out the reduction in value.

But 2008 has marked a change in this, as one investment manager explains to Reuters.

Terence Moll, head of multi-asset strategy for Investec Asset Management, notes that the successful market over the past six years left some asset classes overpriced.

He adds that, when investments are overpriced, diversification does not work as a means of offering security.

Reuters goes on to suggest that markets such as real estate and hedge funds - which have no perceived link with conventional stocks and shares - are still not insulated from the turbulence.

The newswire previously reported that a number of factors are combining to impact on the stability of the UK economy despite interest rate cuts by the Bank of England.

Andrew Sentance, a member of the Bank's monetary policy committee, explained that the rate cuts will take time to filter through to the consumer market.

Reuters noted that sterling had dropped in value as investors anticipated the rate reductions - but added that the Royal Institution of Chartered Surveyors has seen a slowing in the pace of house price falls.