Last week, the world experienced an extraordinary event: Apple’s market capitalisation outpaced the entire value of the UK stock market. Think about that for a moment. 1,926 of the UK’s largest and most successful companies are now worth less than a single company in the US. This is extraordinary and well worth reflecting on, both in terms of how far the UK has fallen as a stock market, and how valuable companies in other geographies are becoming in comparison.
There are valuable lessons to be learned from this incident. Firstly, ‘home-bias’, the behaviour of over investing in domestic companies because they are familiar and easy to research, means many UK investors accumulate concentrated risk in UK companies. We see this over concentration consistently with new client portfolios when we initially meet them… and it’s expensive. For example, in the last 20 years over-exposure to UK companies has hurt investor’s returns by 2% per annum on average; a huge impact on their wealth. The second lesson is one of diversification, the practice of spreading investments across a variety of assets to minimise exposure to any single asset or risk. This is a fundamental principle of prudent investment strategy, comparable to the concept of not putting all your eggs in one basket. Diversification has consistently shown to be an effective form of protection against market volatility, safeguarding investment portfolios in the long term. The recent Apple phenomenon underscores this crucial concept.
While Apple’s surging valuation demonstrates the potential for impressive growth in a single stock, it also starkly illustrates the potential risk of over-concentration. The situation underscores the importance of diversification and prudent risk management in achieving a balance between the mitigation of risk and the potential for reward.
At Citywide, we think long and hard about diversification. We don’t believe that buying the same type of funds from different managers is diversification, and we are vigilant in avoiding situations that lead to investors owning a single stock multiple times. By reducing the repetition of ownership, and increasing diversification, we mitigate the influence of single stock risks on your portfolio, promoting a more balanced investment approach.
This constant examination explains why we invest in more than 12,500 individual companies, across every sector, in 56 countries. Such balanced diversification enables us to build portfolios that are durable and avoid the consequences of taking ‘ill placed bets’ on single stocks, countries, or industries.
Our strategy enables clients to sleep well at night, secure in the knowledge of a sound financial future.
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Please remember that this is only one aspect of the market that could affect your investment decisions, which is why working with a financial planner is a good idea. A planner can provide a much needed second opinion and even act as a sounding board, and help you understand when you might be falling foul of biases that might lead to a costly decision.
At Citywide Financial Partners, our ongoing working relationship with you means we gain a better understanding of you and your thought processes. As such, we can provide bespoke solutions that help you meet your financial goals and explain it in a way that provides you with the confidence to make better decisions with your wealth.
If you would like to discuss your investments, or how we could help you make decisions you’ll thank yourself for down the line, please email firstname.lastname@example.org, we’d be delighted to help.
This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation will be different. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The information is aimed at retail clients only.
Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.