4 ways to diversify your investment portfolio

Popular technology stock Nvidia saw 10% wiped off its share price this week, hitting some people's investment portfolios particularly hard.

Over the last year, the average passive technology fund returned 30.4% on initial investments, leading to more investment and a greater proportion of tech stocks in many investors’ portfolios.

Nvidia, an American company that primarily produces computer chips, had been one of the shining stars of that growth - its share price is more than double what it was last year - as they benefited from increased AI interest from both customers and investors. But, if you had invested £10,000 in Nvidia when the excitement was at fever pitch and it hit its highest price - $140 in June - you’d be down to £7,673 today.

If you were invested more broadly,  growth in other areas may have been able to pick up the slack where Nvidia has stumbled. Here, Which? digs into four ways to balance your portfolio.

Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.

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1. Invest in different assets

One way to keep your investments balanced is to invest across different asset classes - including shares, bonds, and cash.

For example, the price of shares and bonds have typically moved in opposite directions. Meaning when shares are down, you’re likely to have rising bond prices as a buffer against those losses.

We usually see this relationship in action during a recession, when share prices take the biggest hit.

The spread between assets you choose should relate to how much risk you want to take on. This is often driven by where you are in your life and what you’re saving for. If you’re older and closer to retirement, you might want to gradually shift the proportion of your money invested in equities towards safer assets like cash and bonds.

This means that when the time comes to take your money out to spend, you’ll be far less at risk of selling at a bad time if there’s a sudden drop in the value of your investments.

It’s worth checking in once a year or so to re-balance your investments to the proportions you want, as they may not grow at an even rate - leaving the proportions to skew over time away from your original intentions.

You can add this diversification into your portfolio yourself, or invest in multi-asset funds which the fund manager will continually re-allocate on your behalf. Similarly, if you want an expert's advice on what is best for you, and someone to take care of re-allocation, you can hire an independent financial adviser.

• Find out more: types of investments explained

2. Invest in different countries

If you invested all of your money in one area, for example, the UK in a fund tracking the FTSE 100, you’d be far more susceptible to UK-specific economic shocks.

By spreading your money across different countries, you might be able to pick some gains that help balance out poor conditions elsewhere. With this in mind, consider countries whose economies aren’t as closely linked.

For example, the Chinese SSE 50 index recovered more quickly than the UK’s FTSE 100 from the after-effects of the Covid-19 pandemic in 2021, only to drop again over the ensuing years to back below pandemic levels. The US S&P 500 grew much more than both of these markets in the same period.

From the same data you could take the lesson that you should just put all of your money into the US, but - as investors in China’s SSE in 2021 would have discovered - past performance is no guarantee of the future.

3. Invest in different sectors

You’ll be able to add balance to your investments by investing in different assets and different countries, but you could benefit further by having the shares you invest in spread across industries.

For example, some sectors will be hit especially hard by a recession - it won’t matter too much to companies providing essential services that consumers are spending less, whereas it could cause real problems for companies, like retailers, that rely on consumers having more disposable income.

Sectors will also likely reach peaks and troughs at different times, so even when a sector is flourishing, it might be wise to have other investments to cover any downturns.

On the technology sector, AJ Bell investment director Russ Mould says: ‘You can see why some investors are nervous about the risk of a bubble in technology, given the sector’s vertiginous rise of the past couple of years and the damage wrought by the last speculative episode.

‘That ended with a bang, not a whimper, and it took the S&P Global 1200 Technology index more than seventeen years to regain the ground it lost during the carnage of 2000 to 2003, when the bubble burst and valuations (and confidence in the sector) collapsed.’

By investing across sectors, you can mitigate risks and benefit from the good fortunes of other industries.

• Find out more: how to buy shares 

4. Invest across different strategies

When you invest in a fund, it will invest based on some kind of strategy - a fund manager could be looking to invest in smaller companies that could see huge growth, to find stocks at a great value, or a fund could be set up to just track an index like the FTSE 100.

Certain economic circumstances will favour one strategy over another. For example, lately, the growth investing style has struggled to keep up with passive funds investing across a whole market and picking up the significant gains of tech stocks.

But, as the last couple of weeks have shown, there’s no guarantee that pattern will continue forever.

If you really believe in a strategy and the thinking behind it, it makes sense to stick with it - but if you're not sure then you can cast a wide net and hopefully get a bit of benefit from them all.

• To learn about other tips to help manage your investments, you can read our guides on how investing works