Imagine there are two people comparing their investment portfolios – one has seen rapid growth, the other is moving along more sluggishly. The first may feel like they’ve got the better strategy and be feeling rather pleased with themselves.
But instead it should set alarm bells ringing.
This is the view of David Coombs, head of multi-asset investments at Rathbones.
On this episode of the Big Money Questions, David explains diversification and why it is important for investing.
It’s not as simple as just making sure all your eggs are not in one basket. It’s about making sure that you have investments that move in different directions from each other, so that you are insulated from some of the worst falls in market distress.
Just having a portfolio of lots of different investments that all move in the same direction means you just lose money more slowly if markets fall, he says. He calls this strategy – or lack of – ‘diworsification’ – trying to diversify but only making things worse.
Much in the same way as buying insurance, there are some investments that you should hold that you should hope to lose money on, he says. Watch the full interview to see how to diversify, the unusual investments that could be considered insurance and where people slip up.