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The Rolls-Royce share price crash shows why investors should diversify among UK shares

Peter Stephens
·3-min read
A stock price graph showing declines, possibly in FTSE 100
A stock price graph showing declines, possibly in FTSE 100

Since the start of the year, a wide range of UK shares have delivered disappointing performances. Among them is the Rolls-Royce share price. It’s currently down by two-thirds year-to-date. That’s a significantly worse performance than the FTSE 100’s 22% drop over the same time period.

The company’s stock price has been negatively impacted by lockdown measures that have led to cancelled flights. The cause of this is the coronavirus pandemic, an exceptional event that couldn’t have been reasonably foreseen by any investor.

This highlights the need for investors to maintain a diverse portfolio of companies when investing money in the stock market. Doing so can reduce risk, and improve long-term returns.

Falling UK shares in the stock market crash

Of course, many other UK shares have also fallen heavily alongside Rolls-Royce as a result of the stock market crash. However, this isn’t an especially unusual event. Certainly, bear markets of the variety seen earlier this year don’t happen frequently.

But the history of the stock market shows corrections and downturns are fairly common events. Indeed, during an investor’s lifetime, they’re very likely to experience a number of them. At such times, the values of their holdings could come under severe pressure.

Trying to predict when the market will fall is an incredibly tough task. Previous bear markets, such as the 1987 crash, the dot com bubble, and the global financial crisis were forecasted by some investors. However, determining when to sell stocks prior to the event occurring can prove to be largely dependent on good fortune.

Moreover, selling UK shares too early prior to a market crash, or misjudging when it when occur, may mean lower long-term returns.

The importance of diversification

The Rolls-Royce share price crash and the decline of a wide range of other UK shares this year highlights the value of diversification. It entails an investor spreading risk across a wide range of companies, sectors, and regions so they’re less dependent on a small number of businesses, industries, and countries for their returns.

This may not necessarily mean they avoid the impact of bear markets. But it does mean they’re less likely to be stuck with a small number of the stock market’s worst-performing stocks. It also doesn’t require any capacity to accurately predict when a stock market crash will occur.

Buying British shares today

Investing money in UK shares after the stock market crash may seem like an unattractive idea to many investors. Especially those who’ve been impacted by the Rolls-Royce share price decline.

However, buying stocks after a market crash can be a logical strategy. They trade at lower prices that can lead to impressive capital returns in the long run. As such, building a diverse portfolio of British shares today could be a logical move. They could ultimately produce a surprisingly large nest egg in the long run.

The post The Rolls-Royce share price crash shows why investors should diversify among UK shares appeared first on The Motley Fool UK.

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Peter Stephens owns shares of Rolls-Royce. The Motley Fool UK has no position in any of the shares mentioned. 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.

Motley Fool UK 2020