The Power of Diversification

Although most people look for guarantees, the advantage of equity investments still remains for beating inflation on an after-tax basis and for rapid accumulation of investment funds. The answer is, to risk is often to recognise the value of diversification by placing money in a variety of assets.

Consider the value of employing a mix of cash reserves, fixed interest securities, property funds and equity funds from UK and overseas versus a single guaranteed fixed return. To show the powerful principle of diversification, consider the following scenarios:

A. A £100,000 investment with a guaranteed fixed rate of return of 8% will grow to £684,850 after 25 years.

B. The same £100,000 could be evenly diversified between five separate investments each with a different degree of risk. One could lose all of its value, one could remain even, one could gain 5%, one could gain 10% and one could gain 15%.

The net result would be an accumulation value of £962,800 after 25 years or £277,950 more than the guaranteed investment. Although two of the investments were underperformed by the guaranteed investment, the diversification into other assets, which did perform well provided a greater long term total return.

SINGLE GUARANTEED INVESTMENT

£100,000 invested at 8% for 25 years would grow to: £684,850

DIVERSIFIED INVESTMENTS

£20,000 at a Total Loss -0-

£20,000 at 0% return £20,000

£20,000 at 5% £67,730

£20,000 at 10% £216,690

£20,000 at 15% £658,380

Total All Investments £962,800

Working together, a variety of products will build a stronger financial program with greater possibility to offset inflation

Figures for illustration only