The golden rule of diversification

By Juliet Schooling Latter on 2 February 2026 in Multi-Asset, Basics

Diversification is a crucial tool for investors. It reduces risk by giving them exposure to a variety of assets, sectors and geographies. The philosophy is that having a decent spread means that losses in one part of the portfolio will hopefully be offset by gains elsewhere.

But how is this achieved?

Contrary to popular belief, it’s not through buying every available fund and hoping everything gels. Here, we outline some golden rules for striking the right balance and suggest funds worth considering.

Types of diversification

Diversification comes in different forms. You can be diversified across investment objectives, asset classes, geographies, sectors, or industries. Asset classes, for example, will generally react to market conditions differently from one another, as long as they’re properly uncorrelated. But you’ll need to do your research.

How not to diversify

Buying lots of different funds doesn’t automatically provide diversification. It all depends on their individual geographic, sector and stock exposures. For example, you may have three UK All Companies funds, but this won’t be a diversified strategy if they all invest in similar stocks.

Similarly, you may opt for a technology fund, a global portfolio, and a fund that buys large-cap American companies, assuming they are all uncorrelated. However, the reality is that the top 10 holdings might be virtually identical, as big US technology companies have dominated global portfolios in recent years.

Three steps to diversification

1. Decide your objectives

Be clear on your investment goals. For example, do you need your overall portfolio to grow by a set amount, or are you looking for an additional income stream? If it’s the former, then you will favour funds that are packed full of exciting, fast-developing businesses. You’ll also likely have more exposure to emerging markets. If it’s the latter, then a portfolio with exposure to more established dividend-paying companies is likely to be more suitable.

2. Choose your asset allocation split

Your objectives will influence your portfolio construction. If you’re approaching retirement, the chances are you’ll want a heavier weighting in safer fixed-income holdings. However, if you’re in your early 20s and saving for your retirement, you can afford to take more risks as you have years for your portfolio to recover from stock market volatility. A traditionally diversified portfolio will have exposure to equities, fixed income, and property, as well as possibly commodities and other alternative assets.

3. Further layers of diversification

You can add further layers of diversification by breaking down each asset class. For example, ensure your equity holdings are split in terms of geographical exposure. Sector allocation is another popular way to diversify the portfolio. This could mean having a spread of financial companies, manufacturers, retailers and IT businesses. It’s even possible to further diversify by company size. This would mean mixing mega-cap multinational giants with smaller businesses boasting modest turnovers.

Approach One: Multi-Asset Funds

There are two approaches. The first – and most suitable for beginner investors or those wanting a one-stop-shop approach – is a multi-asset fund, as they come with built-in diversification. These portfolios will generally have exposure to equities, fixed income and property. The risk taken is determined by the percentage allocated to each asset class.

For example, the Ninety One Diversified Income fund sits in the IA Mixed Investment 0-35% Shares sector. This means its exposure to equities is capped at 35%. We see this fund as an ideal building block for a risk-averse investor looking to move their cash into an investment fund, as most of its assets are held in fixed income.

Then there’s the Aegon Diversified Monthly Income fund, which has an equity allocation of between 20% and 60%. This is a truly diversified, multi-asset fund that has a mix of bonds, equities, property and alternative exposure. Its scope gives the managers a variety of sources from which to derive income.

Finally, the Liontrust Sustainable Future Managed fund, for investors who want diversification – and sustainability – but the potential for more equity exposure. This portfolio is in the IA Mixed Investment 40-85% Shares sector, meaning up to 85% can be held in equities.

Approach Two: Build your own portfolio

An alternative is to build your own diversified portfolio. This will be influenced by your financial objectives, but many people opt for a core-and-satellite approach. This places a handful of reliable funds at the heart of your overall portfolio, which will largely shape your investment approach. Then you can add as many so-called satellite funds as you like to provide diversification and exposure to niche areas.

For example, you may opt for the Capital Group New Perspective fund, which aims to achieve long-term capital growth by investing in global giants such as Microsoft and NVIDIA*. You might then add some value investing. A prime example is Schroder Income, a UK equity income fund that owns dividend payers such as Barclays, British American Tobacco and J Sainsbury*.

Diversification can then come in the form of additional exposures. Once again, these will be based around your financial goals. For example, you could add some geographic diversification through the Chikara Indian Subcontinent fund, which is positioned to benefit from the Indian growth story.

There are also plenty of sector-specific portfolios, such as the Polar Capital Global Healthcare Trust and the WS Amati Strategic Metals fund. Of course, whatever route you choose, it’s vital to monitor your overall portfolio to ensure it’s delivering as expected. Constant monitoring is ideal with a full overhaul at least annually.

*Source: fund factsheet, 31 December 2025