Financial Services for Charities
Importance of Diversifying Investments of Your Charity
When investing, one of the golden rules is to diversify, not to put all your eggs on one basket. It is a method of reducing the overall risk to money invested and is the reason that the investment criteria of the Trustee Act 2000 includes a requirement to diversify.
How do you diversify your investments?
There are many ways of diversifying or spreading your funds to reduce risk. First, the range of assets used may be varied. There are many types of investment assets such as UK equities, Overseas equities, Fixed Interest securities, Cash, Property and Commodities. Each asset price can be affected by different issues. For example, fixed interest securities are generally affected by interest rates and inflation, whereas shares are affected by matters such as economic and market news, company specific information and market sentiment.
The idea is that one asset class could be suffering at any point, but because they are all affected by different issues, it is likely that another asset class is prospering or at least maintaining value. If you hold several asset classes, you are unlikely to lose as much as if you held all your money in one asset.
The key here is balance - your funds should be spread across a range of assets, appropriate to meet your requirements which could be to generate income, steady growth of capital or a balance of the two. Your attitude to risk is important when looking at the balance of assets to be held. If you are more cautious investor, the amount invested in equities would be lower than someone with more appetite for risk, however the understanding is that returns are also likely to be lower.
Once the spread of assets has been decided, the second stage of diversification is carried out within each asset class. Here your funds are spread across the various types of stock or security within that asset class, depending on your requirements. There are thousands of stocks and it is not prudent to hold too few, for the same reasons as explained above. A large proportion of your wealth could be wiped out if you put all your money in one or two shares and one of the companies fails. Spreading your money across many shares is likely to give a better result and should allow you to sleep more soundly.
As trustees, you should take extra care to ensure that the overall risk of the funds invested is managed appropriately and diversification is a simple strategy that works well. There are a number of ways that investments can be diversified and advice from a qualified adviser is the first step.
For further information contact Ruth Dolan, Chartered Financial Planner, on 01227 763939.
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