The single best way to diversify your investments is to spread the risk across several different asset types. At Affinity Independent we strongly recommend strategic asset allocation. The asset allocation programme involves a model showing the optimum level of investment in each of the major asset classes - cash, fixed interest, equities and property. This becomes the 'foundation' of our discussions with our clients.
 
We have a team of dedicated Investment Analysts whose sole responsibility is assessing suitable asset allocation for our clients via bespoke portfolio construction and investment fund research.

The aim is to select asset classes that behave in different ways; the principle being that when one class is underperforming, one or more of the other asset classes are outperforming. For example, some assets, such as bonds and property are particularly useful in creating a portfolio of investments; they behave very differently to equities, often offering lower but more consistent returns. This provides a 'safety net' if there were to be a fall in the stock market. By spreading investment between different asset types, such as bonds and equities, the investor diversifies away many risks associated with the reliance upon one particular asset - this is our key to the concept of diversification within an individuals asset allocation.

Building this mix of investments, often called a Balanced Portfolio, will involve choosing from each of the major asset classes:

UK and Global Equities

An equity investment fund is one which comprises of shares in public limited companies. Returns can be provided by dividend yield (income) and/or growth in the value of the shares.

Historically, equity investment has provided long-term rising income and capital values. In most five to seven year periods, returns have comfortably beaten inflation. However, it should be remembered that past performance is no guarantee of future performance and that investment values can go down as well as up.

Equities offer potentially higher rewards than the other asset classes i.e. cash, fixed interest and property but at greater risk. However, this risk can be reduced by using a collective investment vehicle, such as a unit trust or investment bond, whereby investor's cash can be pooled into a large portfolio of shares and professional fund managers make the underlying investment decisions.

Commercial Property

Property funds enjoy relatively low volatility and provide good, reasonably stable returns over the medium to long term. These funds have performed well over recent years and they carry the benefit of constantly receiving rental income. The funds do not contain general shares but may contain some property company shares. Generally speaking, Commercial Property funds offer good diversification for any portfolio as it is an asset class which is non-correlated to Equities.

Commercial Property has been the top performing asset class over 1, 3, 5 and 10 years (compared with shares, gilts and cash).

(Source: Lipper December 2005)

Fixed Interest & Security

The Fixed Interest asset class includes both Gilts and Corporate Bonds. Gilts are issued by the British Government and are considered one of the safest forms of investment. Gilts provide a good diversification from equities, but returns are generally more modest. Corporate Bonds are issued by companies. They are considered riskier than gilts but can pay a correspondingly higher interest rate to investors. Bonds are oppositely correlated with equities and so provide a good opportunity for diversification.

Cash

Cash and cash equivalent investments, such as money market funds, certificates of deposit and Treasury Bills, are low-risk investments that pay interest. Their short terms and stable values mean they generally provide smaller returns than other major asset classes. But they have one big advantage - they're highly liquid, which means you can turn them into cash at any time without a significant loss in value.