Investing comes with the chance that you may lose some of your capital. To mitigate the chances of this happening, you can diversify by investing in different financial assets, in different ways. For instance, within a portfolio, you can have many types of accounts, within which you can make various sorts of investments. Doing so spreads your investment risk.
Another approach is to spread out your investing. For example, investing little and often will spread your pricing risk out better than investing a single lump sum and then never investing again, as all your cash will be tied to the market conditions at the time you made the single investment. When you spread out your investing, you’ll naturally invest at peaks and troughs in the market, helping you to spread your risk as well as potentially maximise your returns.
Let’s explore how to diversify your investments in more detail.
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*Total limit for all ISA types
**Per person for the year 2024/25 tax year
***Per person across all investments, 2024/25 tax year
Different ways to invest
The most popular types of account through which you can invest are:
- Stocks and shares ISA (Individual Savings Account).
- SIPP (Self Invested Personal Pension).
- GIA (General investment account).
Each account comes with their own advantages and disadvantages, with your own personal situation having a bearing on which type, or combination of types, works best for you. You need to be aware of how much you want saved in your pension for retirement, what your earnings are and what your tax bracket is as well as many other considerations which can be good to talk through with an adviser.
Let’s briefly outline these account types to see how they can help with investing for diversification:
Stocks and shares ISA
Within a stocks and shares ISA, you can buy and sell a large range of investments such as stocks, bonds and funds - allowing you to diversify within the ISA itself. Plus, what’s great about an ISA is that any appreciation in price and any income received through dividends or coupons are not subject to capital gains or income tax. You can invest up to your annual allowance each tax year through an ISA – for the 2024/25 tax year, it’s £20,000.
SIPP
A SIPP is different to a workplace pension, in which an employer contributes. Instead, a SIPP is a private personal pension where, like an ISA, you diversify by buying and selling many types of investments like stocks, funds, bonds. With a SIPP, you transfer money into it before your income is taxed, reducing how much income tax you pay, making investing through a SIPP tax efficient.
General investment account
You can diversify through a general investment account as they allow you to invest in the same assets as either an ISA or SIPP or other pensions, but they don’t provide you with the same tax benefits. You are, however, given a tax-free allowance for capital gains. The Government has changed the amount dramatically in recent years, with the allowance having reduced further to £3,000 for the 2024/25 tax year.
Asset types
Through the above accounts you can make different types of investments which can ultimately result in a diversified portfolio. Here are some examples of common types of investable assets:
- Stocks - when you buy a share of the equity in a company and become one of their shareholders.
- Bonds - when you buy the debt of a company. It's like you are loaning a company money which they must pay back with interest, according to the yield they set.
- Property - while you can obviously buy flats, houses or office buildings etc for property, there is also the option of REITs (real estate investment trusts)
- Exchange traded funds - ETFs track an entire index ie a group of stocks or bonds. You can buy a share of an ETF giving you exposure with just one transaction to all the underlying companies.
- Mutual funds - a mutual fund is an investment vehicle which pools money from other investors to then purchase a portfolio of stocks, bonds and other financial products. The fund will invest according to a mandate or objective.
- Investment trusts - investment trusts are similar to mutual funds in what they invest in. However, there are a limited number of shares of an investment trust, which are then traded on a stock exchange.
Like different investment accounts, each investment type comes with its own set of risks and rewards. Understanding these factors is crucial for making informed decisions. When trying to boost returns while minimising the risk of losing money, many investors balance high-risk, high-reward opportunities with more stable, conservative options - this is a basic form of diversification.
How to diversify within a single account
While you have access to the same range of investments in any account type, offering the chance of diversification to reduce losses, you may not want to diversify or follow the same investment strategy in each of your accounts.
Why? Because you may want to focus on a different outcome within each account you have.
Different outcomes/goals naturally have a different time horizon, affecting your investment choices and diversification strategy. For example, your SIPP will be for your future retirement, while the goal of one of your ISAs could be to grow funds to pay for a home improvement project or holiday of a lifetime. These goals will result in a different tolerance to risk, which may affect what you choose to buy. Generally speaking, the longer you have to invest, the riskier your investments can be - but this is only a choice you can make after taking advice and considering your situation.
It's also essential to remember that diversifying your portfolio is not something you do once then forget about. It requires regular review to ensure that your holdings are balanced and aligned with your goals. Taking a proactive approach helps manage risks and also means you can take advantage of opportunities when they arise.
Why investment diversification is important
Diversification allows you to benefit from different types of asset classes reacting differently to economic conditions. So if you see a company's share price fall, it doesn't automatically mean that another will drop by the same amount. For instance, if you invest in a fund which focuses on the mining sector, which is negatively impacted by a recently announced Government policy, it doesn't mean that banking sector funds would be similarly hit. So, having a diversified investment portfolio allows you to tap into various sectors, markets and industries, so you can capture opportunities for growth while mitigating potential losses.
Investment diversification is therefore crucial for managing your risk preference and optimising future returns. No investment is secure, so by spreading investments across different asset classes, you can reduce the impact of poor performance in any single investment. It's very much the practice of not putting all your eggs in one basket.
How InvestEngine helps you diversify
When saving for retirement through a diversified portfolio, InvestEngine is a great option thanks to these benefits of the platform
- Managed vs DIY portfolios
- ETF range
- Powerful investment tools
Managed vs DIY Portfolios
Whichever account type you pick (ISA, SIPP or General Account), you can choose to build your own portfolio or have it created and managed by InvestEngine's experts. If you choose to build your own, you have a large range of ETFs from which to choose - giving you the ability to diversify your portfolio. If you choose a managed service, InvestEngine’s experts will ensure that your portfolio is well-positioned whilst also being fully diversified too.
ETF range
You can invest easily in ETFs through InvestEngine, which is great for diversification purposes. ETFs are a very straightforward way to achieve diversification quickly as they give you access to an index or collection of investments in one transaction. They are known to be cost-effective too. InvestEngine offers hundreds of ETFs for you to choose from, so you can find one that closely aligns with your investment goals.
Powerful investment tools
Investing, even if you choose a managed service, can be intimidating. What we liked about InvestEngine were its powerful investment tools, helping you to create a diversified portfolio, even if you manage your pension fund or ISA yourself. Features such as AutoInvest and Savings Plans, One-Click Rebalancing and Look Through, mean you can invest in the markets with confidence.
AutoInvest and Savings Plans
This feature automatically invests any surplus cash in your portfolio. You decide what level of cash you can tolerate before AutoInvest kicks in. InvestEngine’s smart order technology will decide, according to your investment strategy, what trades to make on your behalf, so you never lose out on returns, whilst also remaining diversified.
Savings Plans is a tool which you set up to transfer money from your bank automatically, then AutoInvest puts it to work. It's great for adding discipline to investing. This also helps with the idea of spreading out your investing. Using InvestEngine’s Savings Plans, you can simply set up a regular monthly investment so that you’re always adding a little to your portfolio. And thanks to the platform’s other features, your newly invested cash will always go in the most productive place for you to reach your investment goals.
One-Click Rebalancing
Through everyday market movements, you may find you have a bigger holding in one sector or region than you originally had allocated. The result can lead to a portfolio that is no longer optimally diversified. With InvestEngine’s rebalancing tool, you can rebalance your asset allocation in a single click. The platform’s technology generates the relevant buy and sell trades to realign your portfolio. If you have a managed portfolio, the platform’s experts will monitor portfolio positioning and adjust it accordingly so your investments are diversified.
LookThrough
Finally, the portfolio look through feature is particularly powerful when it comes to ensuring your investments are diversified. You can quickly see what companies, sectors and geographical regions you are currently invested in. Having this feature allows you to manage your investments more easily due to the clearer transparency and insights gleaned.
Finally, while not strictly helping you diversify, you’ll find that InvestEngine has low fees - which means you’ll have more to put towards investing for your retirement. As of February 2024, if you open a SIPP with InvestEngine, you'll pay 0.15%, which is capped at £200 a year. If you open an ISA, there are no account opening fees, so you keep hold of more of your investment returns.
Diversifying your investments with InvestEngine
Diversifying your investments is one of the best ways you can mitigate against investment risk. By investing in a mix of asset classes, which move in different ways during different market conditions, you lower the chances of losing money or capital. When you are trying to maximise the value of your pension and savings for your future retirement, that is of the utmost importance.
But it's not always easily done, however, which is why taking advantage of the benefits InvestEngine offers is so key. Whether you are investing through an ISA, SIPP or general investment account, you can always diversify your investments and invest money in funds across a broad spectrum of ETFs to reduce risk, quickly and easily.
When investing, your capital is at risk. Tax treatment depends on personal circumstances and may be subject to change.
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