How can investors avoid 'diworsification'?

Making diversification work for you

Investment management 101 tells us diversification is needed to achieve the best risk-adjusted return over the long run, writes Emma Saunders, research analyst at Rathbone Investment Management.

In the recent bout of turbulence, it was easier to see the benefits of having assets that do not track equities closely than when everything is going up.  But what makes sensible diversification? How can you avoid diversification becoming 'diworsification'? Do diversification characteristics change depending on market conditions? In order to construct portfolios effectively and manage risk, we divide assets into three building blocks, which play different roles - liquidity (mostly safe-haven government bonds and cash), equity-type (such as shares, corporate bonds and emerging market d...