The FTSE 100 and diversification: why not all your eggs in one basket

The FTSE 100 is the best-known UK stock index. It tracks the 100 largest companies listed on the London Stock Exchange by market value, and its level is reported daily in the news. It is a useful snapshot, but it is not the whole story.

What the FTSE 100 does and doesn't tell you

• It is weighted by size. The biggest companies have the most influence on the index.
• Many constituents earn money overseas. Because large UK-listed firms often operate globally, movements in sterling can affect the index.
• It is concentrated in certain sectors. Compared with global indices, it has historically had a different mix of industries, so it does not represent every part of the economy.

Why diversification matters

Spreading money across different companies, sectors, countries and asset types can reduce the impact of any single holding performing badly. It cannot remove risk, and investments can fall in value.

How investors diversify

1. Index funds and ETFs hold many companies in one purchase, usually at low cost.
2. Global funds add exposure beyond the UK.
3. Regular investing (sometimes called pound-cost averaging) spreads your entry points over time rather than relying on a single moment.
4. Using an ISA or SIPP can shelter returns from tax.

Before you invest

Understand the charges, only invest money you will not need in the short term, and remember that past performance is not a reliable guide to the future. If in doubt, seek regulated advice.

This article is general information, not personal financial advice. Rules and allowances change, so always check the latest position on gov.uk or with a regulated adviser.