Diversification and balance are related concepts, but they are different. Diversification is simply a technical term for not putting all your eggs in one basket. Balance means that your investments are diversified in such a way as to ensuring that, overall, your portfolio has a decent chance of turning in a decent performance regardless of the prevailing economic conditions at any given time. The key word here is “overall”, you accept the fact that different conditions favour different kinds of investments and do what you can to make this fact work to your advantage.
Diversification and balance through asset classes
One way of achieving both diversification and balance is through dividing your investments into different asset classes, such as equities, property and peer-to-peer lending. Of course, equities and property are both very broad terms covering a whole range of options and so even within these classes there is further scope to finesse your portfolio for example you could divide your property portfolio between residential buy-to-let and commercial property.
Diversification and balance through accessing different markets
You can actually invest in many places global via the London Stock Exchange. Many international companies have listing here precisely so that it is easy for them to receive investment capital from UK-based investors. Another option would be to look for a share fund which invests in companies which do business wholly or partly outside the UK. This would take the responsibility for picking individual stocks out of your hands and put them in the hands of a fund manager. If, however, you wished, you could buy shares directly in markets across the world, you would simply need access to a share-dealing platform which allowed this.
Developed markets versus emerging markets
Although the terms developed markets and emerging markets may make it sound like there are two sets of markets in direct opposition to each other, the reality can be rather less clear cut. It would be fairer to say that emerging markets are in a state of progress towards becoming developed markets and different emerging markets can be at different stages of progress in their journey. That being so, in some cases, there may be a difference of opinion between investors as to whether or not any particular market should be classed as an emerging market or a developed market. As a rough guideline, however, undeveloped markets can be held to be those which have low economic development, a lack of liquidity and restricted market accessibility. As one or more of these factors improve, they become emerging markets and when there is sufficient improvement across all of these areas, they become developed markets.
In investment terms, very broadly speaking, emerging markets can be seen as places of high risk but also, potentially, high reward, whereas developed markets are more mature and hence have lower risk but also, potentially, lower reward. Of course, as with many aspects of investment, in reality the situation is typically less clear cut. While developed markets may be home to a number of world-famous “blue chip” stocks, they may also be the locations of “up and coming” companies which have the potential to offer significant returns for those who invest early.
Issues to consider before investing in emerging markets
Successful investors make informed decisions for solid reasons and that means they need to understand both what they are doing and why they are doing it. Expanding your investing horizons into emerging markets can mean either undertaking a significant learning curve or placing your trust in entirely in someone else, such as a fund manager. It may also mean being ready to act quick in response to changing circumstances in your choice of market(s) and accepting that even if you react as quickly as you possibly can, you may still not be fast enough to recover your capital.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.