Does diversifying your investment portfolio really work?

Holding a diverse portfolio of investments is often held as a cast-iron stockmarket rule. But how diverse should your investments be - and does the strategy actually work? Tim Bennett explains.

Novice investors are often told there are two cast-iron stockmarket rules. The first one is: time is your friend. Take the S&P 500. According to Ibbotson Associates in Chicago, someone holding a portfolio that represented the index since 1926 would have lost money just 14% of the time, based on rolling monthly five-year periods, with dividends reinvested. Over ten-year periods this drops to 4%, and over 15-year periods there would have been no losses at all.

But there's a problem with this rule, says Jane Bryant Quinn on Bloomberg. Namely, the longer you hold stocks, the greater your risk of experiencing a collapse, such as happened last year, when the FTSE 100 lost around a third of its value. If that happens just before you want to cash in and retire, you are stuffed.

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