INFLATION

How can diversification help me?

  • Shunil Roy-Chaudhuri
  • 10 November 2022
  • 5 mins reading time

High energy prices have contributed to high inflation, left many people in hardship and driven the government to provide financial support to households facing lofty energy bills. Meanwhile shares (equities), bonds and property investments have undergone global declines, due to investor expectations that central banks (such as the Bank of England in the UK and the Federal Reserve in the US) will keep raising interest rates in an effort to bring down inflation.

Despite this challenging backdrop, some investors could potentially have done very well indeed: those with investments in the energy sector. Unfortunately, investors specifically selecting energy as an opportunity in January would need to have foreseen Russia’s tragic invasion of Ukraine and its impact on energy prices. (I am putting aside sustainability and ethical issues for the moment.)

Unfortunately it is very difficult, if not impossible, to time markets correctly like this on a consistent basis. The price of oil, for example, is up by 13.9 per cent in the year to 3 October, but down in the one-month, three-month and six-month periods to 3 October (1). This variability of returns explains why, at Schroders Personal Wealth (SPW), we say investment is about time spent in the markets rather than trying to time the markets.

Importance of diversification

The variability of investment returns can be seen in the table below, which shows how different types of assets have performed across a number of years. It demonstrates that no single asset type consistently comes out on top and reveals how difficult it is to forecast which one will perform most strongly in the future.

Source: Bloomberg, 31 December 2021

This is why, at SPW, we believe in the benefits of diversification, of not putting all your investment eggs in one basket. Quite simply, by holding a range of investments, you are spreading your investment risk and reducing the risk associated with exposure to one single type of asset.

In our view, when it comes to investing, diversification can help steady the ship in choppy waters. And, against the backdrop of high inflation, investment markets have indeed been choppy this year.

Which particular mix of assets is appropriate will depend on your individual circumstances, on your own financial requirements and goals. A good financial adviser can help you ascertain these financial planning needs. They can also offer insights into which blend of investments could potentially be right for you. And that can provide reassurance in times of high inflation

(1) FactSet, 3 October 2022.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we have used third party sources that we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

Some figures in the text refer to past performance and past performance is not a reliable indicator of future results.

The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors might not get back their initial investment.

There is no guarantee by investing money it will keep level or beat inflation, particularly when inflation is high.

All information correct at the time of publishing.

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