Although you can control many things in life, a global pandemic is not among them. However, an investor can control the asset allocation and diversification of your portfolio. A diversified portfolio comes with numerous benefits because the markets are fast-paced, making it difficult to be updated with the market movements. This also helps them to make decisions about individual investments performing well. As you look for the best ETF broker UK, you must go for one best suited to help you navigate this pain point. You also need a way to help you simplify the decision-making process. A great way to diversify your portfolio is by incorporating exchange-traded funds (ETFs) in your investment portfolio.
Each ETF usually invests in a basket of shares that track an index. ETFs also provide an easier way to achieve diversification by offering access to a wide range of asset classes and markets. You should be aware that it is normal for the share market to fall around one in five years.
Asset allocation is one of the biggest impacts on your portfolio return. When you diversify across various asset classes, you reduce the risks associated with the performance of the share market. It also offers some protection whenever shocks like the COVID-19 pandemic or a global financial crisis occurs.
So, how do ETFs provide layers of portfolio diversification?
Asset Class Diversification
You can use a few strategic ETF trades to effortlessly build a fully diversified portfolio with exposure to the four major asset classes, including cash, fixed income, property, and equities.
Property and equities are usually considered growth assets which means they grow your investment over time. They are also referred to as high-risk, high-reward, and more susceptible to market volatility.
On the flip side, cash and fixed income are regarded as income or defensive assets. These kinds of assets tend to be less volatile than growth assets.
Market Diversification
Studies have revealed that most self-directed investor portfolios usually focus on one share market. This usually stops them from enjoying the global diversification opportunity.
There are several top global developed markets, including the US, Japan, France, UK, and Canada. One ETF investor can access up to 1500 companies, including top global brands like VISA, Nestle, Johnson and Johnson, Facebook, Microsoft, and Apple.
Research has also shown that each country was affected differently by the pandemic. This means that share markets in different regions have unique reactions and fluctuations. As a result, their recoveries will also be different. This trend offers global investors the opportunity for upside overseas markets to rebound.
Sector Diversification
Most investors don’t normally diversify their investments adequately. For instance, some favor financials and materials hence missing out on the exposure to other sectors.
The technology industry was among the best performing sectors in 2020. If you look globally, you might get access to more investment opportunities. However, if you limit yourself to a local scene, you might not have enough opportunities.
Final Thought
If you find all these strategies too much for you, please get the services of an ETF broker. Brokers offer several services that make it easy for you to make decisions.
