It can, however make sense to consider ways of countering the impact and extent of short-term moves. Ahead of realising an investment for example, significant downward fluctuations in value would obviously be unwelcome. Similarly, specific financial circumstances can make individuals more or less accepting of volatility.
Diversification is a proven principle for generating returns in a more consistent and reliable manner. It’s a simple concept: asset classes (like equities, bonds and property) have different characteristics so by spreading your investments across a number of them it’s possible to participate in a broad range of opportunities whilst smoothing out extremes in terms of positive and negative performance.
In this chart the performance of asset types can be seen to vary markedly from year to year – a top performer can see its fortunes swiftly reversed in the following 12 months. Holding a blend of assets, however, can be shown to limit extremes of performance – an approach that can result in a smoother journey towards the investment outcome you’re trying to achieve. The data below reveals that a portfolio invested in equal amounts of the different asset classes would have produced an average annual return of 6.71%.
Pin the tail on the donkey – asset class performance varies year on year
Source: Lipper, as at 31-Dec-19. IA = Investment Association