Portfolio Diversification Strategies Explained For Investors

Though one of the most commonly repeated idioms on the topic of portfolio diversification, the advice of “not putting all of your eggs in one basket” may not suffice when strategising an adequately balanced portfolio as an experienced investor in this current day and age.

The considerable power of a well-balanced investment portfolio has long been recognised across the investment sphere. 

From Hood and Singer’s renowned ten-year 1991 pension fund study, whereby findings suggested asset allocation accounted for 91% of variation in portfolio returns, to more recent widespread analyses that have merited the effectiveness of a diversified portfolio in minimising investment volatility throughout major fluctuating events.

But where portfolio diversification is now a well-adopted and largely accepted strategy for creating risk-balanced, growth-focused portfolios that have the potential to generate favourable returns and mitigate downside risk, identifying the specific routes investors can follow to develop a robust portfolio diversification strategy is not always obvious. 

So, what exactly is portfolio diversification?

At its core, investment portfolio diversification is the strategy of spreading your capital across various investments so that your risk is not concentrated in a single location, such as an asset or market. But too often, the concept is simplified to “not putting everything into stocks” or “holding a mix of cash and shares”.

In reality, true diversification can be as granular as you wish it to be. It may involve allocating across:

• Asset classes
• Geographic regions
• Sectors and industries
• Risk profiles
• Liquidity levels
• Tax structures

Let’s take a closer look at the key dimensions of diversification and how they work together to build stronger portfolios, including some examples of what a diversified portfolio could look like in practice.

Diversifying By Asset Type: Spreading Risk Across Investment Categories

One of, if not the most fundamental, aspect of portfolio diversification is spreading your investments so that your exposure to any one asset type is limited. This is also undoubtedly the most common approach to diversification, and in fact naturally ticks the boxes of some of the other strategies.

Over the last 20 years, we have seen global “asset leadership” consistently fluctuate year-on-year. Where in 2018 international stocks were the best performing asset, in 2019 cash was supreme, and in 2020 Real Estate Investment Funds came to the fore - a pattern that has repeated itself over the course of the last two decades (as illustrated in a 2021 MFS report).

To combat this fluctuating nature of asset class performance, many experienced investors choose to devise portfolio diversification strategies that consider a number of well-performing asset classes.

This approach not only serves to mitigate potential risks from any one asset class’s failure (think recent cryptocurrency market crashes), but has the ability to position investment portfolios favourably for future market exposure to growth - a strategy often manifested in the form of a balance in short and long-term oriented investments.

One of the most traditional models — the 60:40 portfolio (60% equities, 40% bonds) — was designed with this in mind. The idea is to blend higher-growth, more volatile assets (like equities) with lower-risk, long-term assets (such as bonds) to create balance.

However, recent macroeconomic shifts and the rise of alternative asset classes have challenged the viability of the 60:40 model. Inflation, fluctuating interest rates, and greatly increased market uncertainty have prompted investors to look further afield — to assets that offer not only growth potential, but tax efficiency, inflation protection, and diversification benefits that traditional tools may no longer provide.

High-interest bonds

Recent fiscal pressures noticed throughout the UK - from high inflation rates post-Covid to fluctuating interest rates that saw the BoE’s base rate remain at 0.1% for 20 consecutive months - have put increasing pressure on investors’ portfolios this year, especially those that rely on a large proportion of low-interest bonds in a 60:40 split.

With popular low-interest bonds such as gilts and corporate bonds often targeting low APRs, this means that, in many cases, capital held in such assets can, relative to inflation, be eroded over time.

According to a recent piece in The Times, stubborn economic pressures have been the root cause of many investors’ decisions to move away from traditional portfolio diversification strategies, favouring low-interest bonds, and instead opting for more flexible, higher-interest options such as property bonds.

Though a host of bond types can be argued to be suitable alternatives to diminishing government bonds, the asset-backed nature, tax-efficient features (utilising a £20,000 tax-free ISA allowance via the IFISA, for example) and ability to transact on a less centralised basis via peer-to-peer (P2P) loans, are all features that have promoted the suitability of property bonds in a diversified portfolio in recent years especially.

Joint venture property investing

Following the recent rapid acceleration of the UK housing market that saw more than 700,000 house sales in progress in June 2021 (in what was the highest figure noticed in the past decade), diversifying into property has become an increasingly popular choice for experienced investors this year.

And where assets such as property bonds have often been targeted by investors seeking more gradual, incremental returns, joint venture property investing (JV) has been outlined as a high target growth alternative for investors looking to take advantage of the property market with potentially higher returns.

A temporary, formalised partnership of builders, finance houses and developers that contract with one another over the development of a particular project, JVs - although possessing the notable risks associated with property development - can allow investors to negate the higher costs, barriers to entry and liabilities associated with traditional routes such as buy-to-let, and are often accessible via co-investment platforms.

Therefore, for experienced investors with ambitious growth goals and knowledge of - and satisfaction with - the potential risks, it’s no surprise the JV route is playing a growing role in many a portfolio diversification strategy. This is particularly so ahead of the UK’s forecasted 20.2% increase in average property prices between 2024 and 2028, after successfully meeting house price forecasts in the five years up to 2025.

Venture capital investments

Traditionally, stocks have played a significant part in the average investor’s portfolio. A widely available asset class that has the potential to generate high growth in short periods of time whilst also offering a longer-term, gradual growth focus when utilised through investment methods such as index funds, stocks have long been a global go-to when constructing a diversified portfolio. 

But the high volatility associated with stocks (noticed especially recently due to turbulent global stock market conditions) married with the rapid acceleration of the UK startup landscape, has led many investors to reconsider the balance of stocks to venture capital investments in their portfolio.

With early-stage investment consistently backed by government policy throughout 2025 so far, the emphasis on UK venture capital in investment portfolios has grown further.  

Alternative investment schemes such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) have been highlighted as especially attractive routes for experienced investors looking to adapt their portfolio diversification strategy to be less reliant on stocks.

The schemes’ generous tax reliefs (including up to 50% income tax relief), combined with their focus on promising early-stage companies and high target growth positions them as particularly attractive investment opportunities for investors looking to minimise risk, maximise returns and generate positive social impacts amidst the continued UK startup surge. 

Diversifying By Sector: Gaining Exposure To Multiple Industries

Though spreading risk across a host of asset classes is arguably the most important step to consider when building a robust, risk-balanced portfolio diversification strategy, diversifying investments across industries is another key factor to consider, especially when one asset class dominates an investor’s portfolio.

The key motive for this strategy is to ensure that, should an industry be hit by a significant downturn (such as the global airline travel industry, which noticed global stock levels drop in 2020 to less than half their prices in 2019), an investor’s portfolio would not bear the full impact, but rather absorb the hit due to its spread of risk across sectors.

A 2017 Bloomberg analysis conducted on FTSE 100 stock index weightings over the previous decade gives further evidence to the importance of sector risk spreading in a portfolio diversification strategy. 

Whilst the study revealed the three front-running industries in the index of finance, energy and consumer staples remained the same, differences such as a 36% decrease in the percentage weighting of the UK telecom industry from 2007 to 2017 suggested significant shifts in leading industries’ performances were still very possible.

Though case studies and industry data have long supported the merits of applying sector-by-sector risk allocation, this doesn’t necessarily mean an investor must distribute capital across distinctly opposing industries.

Should, for example, an investor wish to capitalise on multiple investments into the UK’s accelerating tech sector whilst maintaining a diversified portfolio, this could still be achieved by distributing investments across a range of sub-sectors.

From data-rich fintech platforms like Finance Nation, to innovative threat intelligence providers such as Intelligence Fusion and touchless digital ordering specialists like QikServe, investing across a range of sub-sectors can be just as effective in spreading risk, especially when combined with tax-efficient investments.

Diversifying away from booming industries

An often-overlooked aspect of sector diversification is the importance of not overconcentrating in high-growth, high-profile industries. Whilst these areas can offer strong short-term gains, relying too heavily on them may expose a portfolio to heightened volatility and downside risk.

The dot-com bubble of the late 1990s offers a clear example. Investors rushed to capitalise on the rapid adoption of internet technologies, often allocating disproportionately to speculative tech stocks. When the bubble burst, many portfolios suffered significant losses. However, those with exposure to more stable sectors and assets, such as telecommunications, healthcare, or gold, were comparatively insulated. Telecom companies with real infrastructure and cash flows held up better, healthcare was seen as a defensive sector, and gold served as an effective hedge.

This historical lesson highlights the importance of balance. Diversifying across sectors isn't just about capturing growth; it’s also about building resilience. Including allocations to sectors that may not be in the spotlight today, but that offer long-term stability or counter-cyclical potential, can help smooth out returns across different market cycles.

Whilst it can be tempting to lean heavily into whichever industry is currently thriving — whether that’s AI, renewables, or biotechnology — it’s essential to consider the broader composition of your portfolio. A more measured approach, with exposure to both high-growth opportunities and traditionally defensive sectors, could offer a more robust foundation for long-term wealth creation.

Diversifying By Location: Looking Beyond Your Domestic Market

Diversifying by location is another well-known principle, but whilst it comes naturally to some investors, it can feel a bit unnatural to others. For example, many US investors tend to have the vast majority of their portfolio tied up in US assets. It’s familiar, it feels safer, and often, the tax advantages reinforce that home bias.

At GCV, we often see international investors looking to back UK startups, not just for the potential returns, but as a way to diversify across both asset types and geographies. And interestingly, many do this regardless of whether they can claim the associated UK tax reliefs. That tells you something: location-based diversification isn’t just about tax; it’s about opportunity, balance and, importantly, currency diversification.

There are several dimensions to geographic diversification. Some investors seek exposure to fast-growing or underdeveloped markets, where valuations may be lower and growth potential higher. Others may deliberately prioritise more stable or lower-risk countries to balance out their portfolio. For instance, someone might view the US market as saturated or overvalued in the short term, whilst seeing better value in overlooked or emerging regions.

Not all diversification is about downside protection; sometimes it’s about upside potential. Chasing growth opportunities abroad can naturally lead to a more geographically spread portfolio, even if that wasn’t the original intention.

Of course, politics, geopolitics, trade agreements and public investment all come into play. A sudden shift in policy or an unexpected crisis can have a dramatic effect on an entire region’s economic outlook. And that’s the point: you could have what looks like a perfectly diversified portfolio on paper — spread across sectors, risk levels, and tax wrappers — but if it’s all rooted in one country, a single unexpected event could still wipe out a disproportionate portion of it.

So, as with all these methods of diversification, whether it's tax structure, asset type, liquidity, or risk profile, the key is balance. Location-based diversification is just as crucial, and when it’s done intentionally, it can complement the rest of your strategy perfectly.

Diversifying By Risk Level: Balancing Growth With Stability

Another common approach to diversification is based on risk. You often see this in pension pots, where individuals can choose a risk level they’re comfortable with, typically reflected in a split between stocks and bonds.

But risk-based diversification doesn’t need to be limited to pensions. In fact, diversifying beyond your pension could be a smart move. For example, an individual might balance a Cash ISA with venture capital investments, higher-risk/reward emerging markets, and more stable, global all-world funds — creating a well-diversified portfolio in terms of risk exposure.

It’s worth noting that many of the highest-returning investments are also the ones that carry the most risk. Being too risk-averse could mean missing out on sizeable gains (on the assumption you aren't simply targeting a few per cent growth each year, of course). Allocating even a small percentage of your portfolio to higher-risk opportunities, especially those with added benefits like tax reliefs, could be a potentially powerful way to diversify and benefit from both ends of the risk/reward spectrum.

Read More: How to invest in startups as a private investor

Diversifying By Tax Efficiency: Enhancing Returns With Smart Structures

Tax-efficient portfolio diversification is more than just a bonus — it can be a strategic way to build and protect wealth across different investment types.

As we’ve laid out, we often think about diversification in terms of spreading capital across different sectors, asset classes, or geographies. But there's another layer to it — how those investments are taxed. Holding a mix of tax-advantaged and taxable assets gives you more flexibility and resilience in the long run.

For example, maximising your ISA allowance can let you grow investments tax-free. At the same time, you might hold property or cryptocurrency, where you would likely pay capital gains tax on proceeds. These are two completely different tax treatments — and that’s a strength, not a complication. It’s a way of saving and growing wealth through different channels, which is really the essence of diversification.

This is exactly where the EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) can come into play — and why they can be such powerful tools for investors. They not only open the door to high-growth private companies, but they also come with a suite of generous tax reliefs. An eligible individual can claim income tax relief of up to 30% (or 50% for SEIS), defer or eliminate CGT, and benefit from loss relief should the investment not be successful.

By allocating part of your portfolio to SEIS or EIS investments, you’re diversifying in multiple ways:

• Across asset types: adding venture capital to the mix.
  
  
• Across risk levels: early-stage businesses offer high growth potential but also higher risk, balanced by the tax incentives.
  
  
• Across tax treatments: reducing your exposure to tax-heavy assets and using government schemes to your advantage.

So, whilst EIS and SEIS are often pitched for their tax perks, the real value comes when you see them as part of a broader, tax-efficient portfolio strategy. Not only do they support innovative UK businesses with the potential for high returns, but they also help you build a more balanced, future-proof investment portfolio.

Diversifying By Liquidity: Blending Short-Term Access And Long-Term Growth

Another layer of diversification that often gets overlooked is liquidity — how quickly and easily you can access your money if you need to. It's not just about what you're investing in, but how accessible that investment is.

For example, holding cash or funds in an ISA or savings account gives you quick access, useful for emergencies or unexpected opportunities. At the other end of the spectrum, you have options like property, private equity, and venture capital (EIS/SEIS included), which typically require you to tie your money away for longer periods.

Neither end of that spectrum is right or wrong; they just serve different purposes. The key is having a balance. If everything you own is liquid, you may well miss out on some of the best long-term investment opportunities. But if everything’s tied up, you could end up in a bind if you need cash unexpectedly.

That’s where blending the two is important. Having part of your portfolio focused on accessible, short-term options gives you breathing room. It means you're not forced to sell a long-term investment at the wrong time just to raise cash, and in the case of pensions, this would involve significant fees. On the flip side, allocating capital to longer-term, less liquid investments — like those accessed through alternative investments — allows you to pursue potentially higher returns and take advantage of the significant tax reliefs that come with more patient capital.

In short, thinking about liquidity is just as important as thinking about risk or returns. A well-diversified portfolio isn’t just spread across asset types — it’s also layered in terms of time horizons and access. Getting that balance right may make a significant difference over the long term.

Portfolio Diversification Examples​

With all of these aspects considered, it might seem impossible to tick every box without ideas clashing. Since there is a significant amount to take in on the subject of portfolio diversification, here are a few examples of what a diversified portfolio could look like, taking note of everything we have previously discussed with various styles of investing considered: 

Please note: these examples are for illustrative purposes only and should not be considered as any form of investment or financial advice.

Low-risk portfolio split

• 30% Government Bonds (UK, US) (low risk, stable returns) (often as part of a pension pot)
  
  
• 25% Global Equity Funds (broad, diversified exposure to global established markets)
  
  
• 25% Cash ISA & Premium Bonds (UK) (liquidity and low risk)
  
  
• 15% Property (potentially buy-to-Let or second home) (steady income and value appreciation)
  
  
• 5% Venture Capital (EIS/SEIS) (tax efficiency with a small, controlled risk exposure)
  
  

How It’s Diversified

A low-risk portfolio primarily focused on global equity funds, offering broad exposure to large, stable markets across diverse sectors and geographies. Government bonds provide steady, predictable returns with low volatility, whilst cash ISAs and premium bonds ensure liquidity with minimal risk. Property allocation offers a stable, long-term growth opportunity, and venture capital exposure through EIS/SEIS adds some high-potential upside with attractive tax reliefs, though it is kept at a very low percentage to maintain minimal overall risk.

Medium risk portfolio split

• 40% Global Equity Funds (diversified across global markets, offering steady growth potential)
  
  
• 12% Property (stable income and growth, lower volatility)
  
  
• 12% Bonds (diversified fixed-income exposure)
  
  
• 10% EIS/SEIS VC Exposure (tax-efficient, high-growth potential with added risk)
  
  
• 10% Cash ISA (liquidity and minimal risk)
  
  
• 5% Property Bonds (specialised property-related investment with higher yield potential)
  
  
• 5% Commodities (diversification through a non-correlated asset class)
  
  

How It’s Diversified

The medium-risk portfolio maintains a solid exposure to global equity funds for long-term growth, whilst EIS/SEIS venture capital allocation offers tax benefits and access to early-stage startups. Property investments, including property bonds, provide diversification through physical assets, offering potential income, growth, and tax efficiency. Bonds add stability and help reduce overall volatility, whilst cash ensures liquidity. The inclusion of commodities diversifies the portfolio further by introducing an asset class that behaves differently from equities and bonds, balancing overall risk.

Higher risk portfolio split

• 25% Global Equity Funds (broad growth potential across global markets)
  
  
• 20% EIS/SEIS VC Exposure (tax-efficient venture capital investments with high growth potential)
  
  
• 10% Emerging Market Equities (higher growth potential with added risk from emerging markets)
  
  
• 10% Cash ISA (liquidity buffer to balance out high-risk exposure and seize high-return opportunities)
  
  
• 10% Private Equity (longer-term investments with higher returns but illiquidity risk)
  
  
• 5% Property (stable income and growth, with lower volatility)
  
  
• 5% Volatile Single Stock Picks (high potential returns but with significant risk)
  
  
• 5% Cryptocurrency (speculative exposure with high upside potential but volatility)
  
  

How It’s Diversified

A high-risk portfolio aims for growth by investing in global equity funds and emerging market equities for stability, along with a mix of top-performing high-return investments. EIS/SEIS venture capital exposure offers tax reliefs and the opportunity to invest in fast-growing startups, presenting the potential for substantial rewards. Private equity can deliver high returns, though it comes with longer holding periods and higher risk. Cryptocurrency introduces a speculative asset class with significant upside potential but also notable volatility, similar to speculative single stock picks that may be either short or long-term investments. Property adds stability and income generation to the mix, whilst cash serves as a buffer for liquidity needs.

How to build an investment portfolio in practice

The investment portfolio examples above are purely illustrative and are not a recommendation.

Instead, consider using them as a springboard to understand what your own strategy may look like. Everyone’s financial goals, risk appetite, and tax situations are different, especially in 2025, where economic shifts and new tax rules are pushing investors to think more strategically. Relying on a one-size-fits-all template found online is unlikely to reflect your specific circumstances.

For example, if you're planning around inheritance tax, your focus might be on building a diversified portfolio designed to reduce the value of your taxable estate. If you're a high earner, your priority might be finding efficient ways to reduce your income tax burden. 

Whatever your goals, your portfolio should evolve with your life, and diversification, when done right, is possible for everyone.

The Potential Complexity Of Diversification

A point you may have noticed from the examples above is the increasing complexity that tends to accompany higher levels of risk. This complexity is part of the natural balance between risk and risk management–in this case, diversification. In theory, a high-risk portfolio could consist entirely of volatile single stock picks, but most would agree this approach is far from ideal from a risk management perspective.

As risk levels rise, portfolios typically become more complex, incorporating a broader mix of assets. This brings a few implications: more time spent researching each asset, and more time required to actively manage a wider, more diverse portfolio.

For example, an individual investing in equity funds might automate their contributions and comfortably ignore short-term market volatility. In contrast, someone with a focus on individual stock selection is likely to spend significantly more time conducting due diligence, monitoring positions, and staying updated on market developments.

In short, as your risk exposure increases,  your involvement is likely to increase proportionally.

However, higher-risk investing doesn’t always demand a significant time commitment, especially when supported by the right infrastructure and a clearly presented pipeline of opportunities. 

At GCV, we aim to make tax-efficient venture capital investing as straightforward and accessible as possible. Via a deal-by-deal model, supported by our intuitive platform and clear, consistent investor communications, we equip investors with the information, tools, and ongoing updates needed to make confident, well-informed decisions, without being overwhelmed by the process.

Continually Build On Your Portfolio

Whilst you may at present have an adequately diversified portfolio that includes an optimal range of asset classes spread across a host of industries and potentially even international economies, the key to retaining an effective portfolio diversification strategy is to continue building on it.

Using long-term portfolio development techniques such as cost averaging, although not preferable for every investor, can allow investors to systematically invest equal amounts spaced over regular intervals over a prolonged period of time, and is just one strategy commonly used for future portfolio planning.

Effectively pre-empted allocation strategies, such as cost averaging, encourage investors to smooth out the peaks and troughs associated with market volatility, helping to avoid the common mistake of making a poorly timed, concentrated investment. This approach also aims to reduce the mental and psychological strain of investing by removing the emotional urge to time the market.

Not only does continually building on your portfolio give you the opportunity to notice peak investment periods, but it also allows the investor to identify shifts and trends between asset classes. As illustrated previously on MFS’s’ ‘20 Years of the Best and Worst’ report, what is an ideally risk-balanced, growth-focused portfolio now may not be so in five years' time.

Regardless of experience, background or industry, decades of research and case studies suggest that developing an effective portfolio diversification strategy that follows specific processes and makes use of established alternative investments can have decisive impacts on an investor's portfolio performance, flexibility and durability throughout changing market backdrops.

While it’s undeniable that single-asset investment portfolios – whether focused on stocks, cryptocurrency, or property – have seen and will continue to see success when executed well, diversification remains key. It helps maximise the potential for future returns, reduce the impact of unforeseen events, strike a better balance between growth and impact, and improve overall tax efficiency within your investment portfolio.