Market volatility and instability seem to be the norm these days when it comes to our financial portfolio. With global economics scrambled between pandemics, political uncertainty and wars, our investments are balancing on the edge, struggling to earn decent returns. How do we reduce risk if we have no control over the markets?

Diversification is the keyword here. Variety spreads our assets, to reduce risk.

 

What is diversification?

Diversification is the process of distributing your portfolio over different economic regions, asset classes and sectors, to mitigate risk in the market. Each area reacts differently to global economic events, so, if one area is affected negatively, the other areas make up for the losses. Although diversifying a portfolio of assets is no guarantee against loss, it is your best strategy to maintain long-term financial goals while minimising risk.
How to diversify your investment portfolio?

 

There are ways to mitigate risk to your financial portfolio by dividing it into various areas.
•    Economic regions – Divide assets over various economic regions, like investing in funds in the US, Asia, Europe, and South America. Economic regions react differently to occurrences; for example, while US-based funds over low returns, the European markets or Asia may be performing well and offer good growth.
•    Asset classes – Another way to mitigate the risk of loss is to follow an asset class strategy where you divide your investments between various asset classes, e.g. equities or stocks, cash, or bonds.  Equities are usually shares in companies like Google, Amazon, Morgan Stanley, and Tesla motor company, for example. They are higher in risk but usually offer higher returns. Bonds are, in their simplest form, a loan to a government or company in exchange for a fixed rate of return. Bonds are lower risk but also offer lower returns. Cash or cash equivalents mean actual cash on hand and securities that are similar to cash. It is a low-risk investment and offers a lower return than other asset classes.
•    Sectors – This entails spreading your investments over various sectors like financials, energy, technology, pharmaceuticals, property etc. This normally involves buying shares or stocks in a company or business that specialises in a sector, like Microsoft, Google, or Apple in the technology field. 
If one sector performs badly due to global conditions, for example, property prices are on the decline, other sectors, such as pharmaceuticals, for example, might perform favourably. So basically, you are spreading the risk of loss for your portfolio. 
•    Alternatives – Alternatives are different investments that don’t fall into the basic three asset classes. These could be investing in property, crypto, new venture capital / business investment, or even the art market, for example. These alternative funds are another good way to bolster an investor’s portfolio risk. Advisors usually recommend allocating a smaller percentage of your investment portfolio to these different funds, as they are more difficult to convert into cash or have higher fees attached to them.

 

Is ESG investing part of diversification?

ESG investing (environmental, social and governance) encourage investors to invest in ESG-friendly companies that promote sustainable practises. 

According to deVere CEO Nigel Green, “Global ESG assets are on course to surpass the $53 trillion mark by 2025, as per a Bloomberg Intelligence report, representing over a third of the $140.5 trillion in projected total assets under management.

Beforehand, ESG investments were often thought of as a ‘new quirk’ or ‘nice to have’, but now they should be part of everyone’s investment portfolio.”

 

Diversification is not a once-off thing

Only a qualified financial advisor can help with a diversified financial portfolio strategy that can withstand time and market instability. Your financial advisor will do regular reviews of your portfolio and rebalance your investments to maintain your risk profile and help ensure stable growth over the long term, and, ultimately, achieve your financial goals. This means replacing any underperforming funds with new, better-performing ones or ones that have lower fees or a stronger returns history.

Chat with your financial advisor today about how to diversify your investment portfolio. 

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your deVere advisor for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.