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A lesson in diversification

The collapse of Carillion has been shocking and very sudden.

Just last week Carillion was the UK’s second largest construction company employing 43,000 people globally and enjoying a turnover of in excess of £5 billion in 2016.However, Carillion has been forced into liquidation due to £900 million of debts and £600 million pension surplus.

Many thought that Carillion was too big to fail. The government relied on Carillion to deliver many government contracts including building hospitals, managing schools, highways and prisons.

For everyone holding direct shares in any company, this is a sharp lesson in simple investing. Concentrating your wealth in one company brings with it all the risks of the stock market, that sector and that particular company. If it performs well, you can win big, but if it performs poorly, or fails completely, the losses can be catastrophic. Every company, no matter how big, can come crashing down and wipe out the value of its shares overnight. Anyone who had significant wealth in Carillion is now hurting, a lot.

But if the risk in shares is this big, is there anything you can do to combat it? Thankfully there is, and it’s no financial sorcery. The key is diversification.

Diversification is the practice of owning lots of different investments in order to reduce your exposure to the risks of any one company. So, in a diversified portfolio, there is likely to be an amount of pain felt at the Carillion collapse. But this will be reduced by the holding of other companies, sectors, stock markets and asset classes that are performing well.

We believe so much in diversification that we have made it one of the keys to our investment philosophy. Without it, you put your financial future at more risk than is needed. In other words, don’t put all your eggs in one basket!!

Investing is often necessary to secure the financial future you want. However, don’t take unnecessary risks with your money. An intelligent, well thought out approach to investing can make a huge difference to protecting against the risks of investing in specific companies.