Here’s how I’m diversifying with UK shares to aim for stunning returns!

Investing in UK shares remains an effective way for individuals to diversify their portfolios. I’ve chosen to buy FTSE 100 stocks to spread my risk.

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Diversification is one of the most important principles for stock investors to follow. The good news is that there’s a huge variety of shares that individuals can buy to reduce risk and maximise returns.

In fact the number of British investors diversifying their portfolios has risen in the past 12 months. A survey from eToro shows that foreign-listed shares, bonds, and cash have all become increasingly popular, as the table below shows.

Asset classQ1 2022Q1 2023% change
Domestic equities48%43%-5%
Foreign equities25%28%3%
Foreign bonds10%16%6%
Domestic bonds31%33%2%
Commodities11%26%15%
Cash31%43%12%
Alternative investments (e.g. real estate)15%17%2%

Maximising returns

The 5% decline in domestic investors holding UK shares illustrates growing fears over the British economy and how this could hit corporate profits. However, it’s not just fear that’s caused investors to diversify their assets.

More investors are holding cash today as high interest rates have boosted returns on savings products. There’s also been a switch into commodities as raw materials like oil have soared in value.

Diversifying with the FTSE 100

In fact, despite what a cursory glance at the figures suggests, eToro’s survey shows that confidence among investors has spiked over the last year. It says that optimism is at its highest since the fourth quarter of 2021.

I myself have continued to diversify my own portfolio. Yes, I’ve increased my exposure to government and corporate bonds. But I continue to dedicate the lion’s share of my capital to buying UK shares.

This is because stocks offer a superior long-term return compared to almost all other asset classes. The FTSE 100 has provided an average annual return of around 8.9% since its inception, for instance. That’s based on all the possible five-year holding periods going back to 1984.

Three shares I own

There are also multiple ways that UK shares can allow me to spread investment risk.

Take Unilever, for example. This is a FTSE 100 stock I’ve held for years. Because it operates in 190 countries, profits aren’t dependent on strong economic conditions in one or two territories. So the dangers are greatly reduced.

This is the same reason that I’m invested in Diageo. The drinks giant operates in 180 nations across the globe. And like Unilever, it’s in both developed and emerging economies. This gives them both stability and the chance to capitalise on fast-growing developing regions.

Finally, they also own broad portfolios of different goods. So if demand for a particular product falls, they can still grow profits at group level.

This is also why I purchased shares in mega miner Rio Tinto. It produces a wide variety of metals including copper, iron ore, lithium and aluminium.

Furthermore, owning Rio shares allows me to indirectly diversify my portfolio by providing exposure to commodity markets. This is an alternative to, say, buying an exchange-traded fund (ETF) that tracks industrial metal prices.

There are many other large-cap FTSE shares out there that can provide brilliant diversification. And following recent market volatility I’m looking to buy more British blue-chip stocks to help me spread my risk.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has positions in Diageo Plc, Rio Tinto Group, and Unilever Plc. The Motley Fool UK has recommended Diageo Plc and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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