23.08 Liontrust Views Summer 2023 Literature (Single) - Flipbook - Page 12
Diversifying
IS AS IMPORTANT AS EVER
The temptation is strong today for investors to put all their money in cash deposits with banks and
building societies giving the best savings rates for many years. This temptation is made all the
stronger by the recent memories of the turbulence seen in equity and bond markets in 2022. But
in such times, the lesson about never putting all your eggs in one basket is as important as ever.
If investors wish to make real returns, so
that the spending power of their investments
keeps up with, and potentially even
exceeds, the rate of inflation over the long
term, then this means investing beyond cash.
This is because when inflation is 7.9%1 and
the rates on savings accounts range from
4.30% to 5.25%2, these cash investments
are guaranteed to lose real value. What
can investors do?
ways according to what is happening in
the markets. However, when it comes to
determining the mix of investments, this
should be based on your attitude to risk,
your investment goals and the time horizon
in which you plan to stay invested.
It is also worth diversifying across time, with
different investments held or due to mature
at variable times. This means you are not
relying on many different investments to be
performing at the same time.
Investors should consider diversifying their
investments to reduce risk and reap benefits
from across the asset classes. Diversification
means having a variety of different
asset classes and styles of investments in
your portfolio, such as bonds, equities,
investment trusts, commodities and property
as well as cash. While cash can give
stability to portfolios by delivering low-risk
steady returns, other asset classes with track
records of beating inflation over the longer
term are needed to potentially enhance and
deliver real returns.
Alternatives to cash
Two alternative asset classes to cash are
bonds and equities, both of which offer
attractive long-term risk-return profiles that can
be used effectively to diversify portfolios.
Bonds are IOUs issued by companies and
governments with the promise (although by
no means guaranteed) of regular interest
payments and the return of the money
borrowed at the end of a term. Some bonds
are ‘perpetual’, which means they never
mature but continue to provide interest
payments, in theory, forever.
Diversification reduces volatility because
asset classes will perform in different
To achieve stronger returns over the long
term, it is normally necessary to invest a
proportion of your portfolio in equities or
shares, although they are significantly more
volatile than cash.
Equities give investors fractional ownership
of the prospects of a business generating
capital growth and income from dividends.
Although some companies do fall by the
wayside, historically companies have
proved to be highly successful at generating
returns that exceed inflation, as demonstrated
by the long-term returns of stock markets.
Companies are seen as having an in-built
defence against inflation because they can
pass increasing costs onto consumers by
raising their prices, although this will depend
on the market power that they wield.
For example, Figure 1 shows how the
total returns from equities have outstripped
inflation in most of the years between 1990
and the present day, sometimes by 100%
or more, although they have dipped into
negative territory in some years as well,
illustrating their greater volatility.
Fig. 1: Rolling six-month total return on UK equity from 1990 to 2023
120%
100%
80%
60%
40%
20%
0%
-20%
Source: Bloomberg, 13 June 2023.
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