Diversification means not relying on one thing
Diversification means spreading your pension across different investments so that one company, sector, country or asset type does not decide the whole result.
A diversified fund might hold thousands of companies across different markets, or a mix of shares, bonds, cash and other assets. The aim is to reduce dependence on a single outcome.
Diversification does not stop losses. In a broad market fall, many investments can decline at the same time. But diversification can reduce the damage from being too concentrated in one area.
The right amount of diversification depends on the role of the fund. A broad multi-asset fund may already be diversified, while a specialist fund may need to be used carefully.
What to look for
- Spread across asset types.
- Spread across countries and sectors.
- Avoid over-reliance on one provider or fund style.
- Understand what each fund adds.
- Do not confuse many funds with good diversification.