How diversified is your portfolio, really?

In a previous article, we talked about the importance of building a balanced portfolio with the right mix of shares and bonds¹ for you.

Diversification goes a step further. It’s about how your money is spread within those asset classes.

Diversification is important because it helps your money grow over time while reducing the impact of any one investment performing poorly. But achieving diversification isn't simply a case of owning lots of investments. You could hold several funds that are all exposed to the same part of the market.

We explore what diversification means and three ways to check how diversified your portfolio really is.

What does a diversified portfolio look like?

Diversification means spreading your investments across different companies, industries and regions of the world, so you’re not relying too heavily on one part of the market.

If too much of your portfolio is focused on one particular area, it could suffer larger losses if that area performs poorly.

Spreading your investments gives you a better chance of benefitting from growth, wherever it comes from. It also helps reduce the impact if one area of the market struggles.

Why not all funds offer the same level of diversification

A fund can hold hundreds of individual investments, but that doesn’t necessarily mean it gives you all the diversification you need.

For example, a technology fund may invest in lots of different tech companies, but they’ll be affected by many of the same industry trends. A UK equity fund may be spread across several sectors, but its performance still depends heavily on the fortunes of a single country. There's nothing wrong with taking this more focused approach if you want greater exposure to a particular sector or region. The trade-off is that your portfolio becomes more reliant on the performance of that part of the market.

A global equity fund spreads your money across thousands of companies in different industries around the world. It gives you access to a much broader range of companies and markets than a fund focused on a specific theme or region.

Why more funds don’t always mean more diversification

Having more than one fund may feel like an easy way to spread risk. But different funds often hold many of the same underlying investments.

Imagine you had a global equity fund, a US equity fund and a technology fund. All three could have significant exposure to the same group of large US technology companies.

Your portfolio may contain several funds, but it could still depend heavily on one market, one sector and even the same companies.

Three ways to check how diversified your portfolio is

To check whether your portfolio is truly diversified, consider asking yourself these three questions:

Remember, these questions focus on diversification within your investments. It's also important to consider whether you have the right balance of shares and bonds for you.

What to consider if you find gaps or overlaps

Finding gaps or overlaps doesn't necessarily mean you've done anything wrong. But it may be a sign that your portfolio isn't working as well as it could.

If you identify any gaps or overlaps, you could consider removing funds that do a similar job or adding investments that help broaden your diversification.

Another option is an all-in-one ready-made portfolio. These combine a range of investments into a single fund, making it easier to achieve broad diversification without needing to choose and monitor each investment yourself.

Before making changes, check whether the resulting portfolio remains aligned with your goals and attitude to risk.

How Vanguard can help you build a diversified portfolio

Building a diversified portfolio might seem complicated, but it doesn’t have to be. 

At Vanguard, we offer a range of services to help you get started, depending on how much support you want along the way:

• Build your own portfolio: if you’re comfortable being hands on, you can choose from our wide range of low-cost funds and exchange-traded funds (ETFs) to build a portfolio yourself.
  
  

• Ready-made portfolio: if you want to keep things simple, our LifeStrategy funds and Target Retirement funds combine multiple index funds into a single ready-made portfolio.
  
  

• Managed services: if you’d like a helping hand, our Managed service does the work for you. We select a portfolio of investments on your behalf and manage it for you over time.
  
  

Whichever approach you choose, the aim is the same: building a diversified portfolio that supports your long-term goals.

¹ Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

Investment risk information

Investing gives your money the opportunity to grow over time, but market movements mean values can rise and fall along the way.

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For further information on risks please see the “Risk Factors” section of the prospectus on our website.

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