Most investors are familiar with the idea that diversification can help reduce the risk attached to their portfolio and smooth total returns over the longer term. It’s a simple principle: not having all your eggs in one basket means the risks of out-and-out failure – though also the chance of stratospheric success – are diluted. Moreover, even if holdings in a portfolio all do equally well over time, it’s likely that their fortunes will ebb and flow, so you should get a smoother ride.
UK companies as a whole have been among the world’s most reliable and generous dividend payers historically. Russ Mould, investment director at AJ Bell, says: “Dividend payments date back to the mercantilist origins of the British Empire. At the time, ships and voyages were funded by the wealthy, who took their cut on the return of those vessels, once costs had been met and goods sold (assuming the ships returned).”
Over the past year, markets have seen a sea change. Gone are the days of hopeful talk of “global synchronised growth” and the continuation of the bull market; instead, there has been a return to volatility and growing fears of difficult times ahead. In the face of such bearish sentiment, should nervous investors think about returning their portfolios towards more defensive investments? The answer to that question depends to some extent on your timescale.
With so many political and economic worries confronting world stockmarkets, and rising interest rates threatening bonds as well as equities, it is hard to know where to turn.
There has been a marked decline in investor bullishness over the past few months. The US market roared ahead, but global indices from Europe to Asia Pacific have stumbled. Growth has been slower and economic indicators across continents have been disappointing.
If history is any guide, we may be nearing the end of a strong run in stock and bond markets. At more than 3,450 days, the bull market run in equities is already the longest in history and bond markets have started to roll over. There are sound reasons for this: interest rates are rising, valuations are high and the geopolitical environment is increasingly uncertain.
We consider gold and other diversifiers you might want to use as safe haven assets