“As in most subjects relating to money management, there’s a wide diversity of opinion on portfolio concentration versus diversification” – Whitney Tilson

3 min read

How To Diversify Your Portfolio

“As in most subjects relating to money management, there’s a wide diversity of opinion on portfolio concentration versus diversification.” – Whitney Tilson

3 min read

You will often hear that diversifying your investments is a crucial strategy to mitigate risk(s).

What you will find less often is exactly how to do this.

Read on to find out how you can diversify your portfolio, considerations you need to make, and what to look for as you continue, or begin, your investment journey.

What is Diversification?

First of all, it is important to know just what diversification involves.

In brief, it involves spreading your investments across various asset classes, sectors, and geographies, with the goal being to reduce exposure to any single investment, thereby minimising the impact of poor performance in one area on your overall portfolio.

Using equities as an example, you would invest in more than just one single company.

Why Diversify?

The reason you may want to consider diversification is quite simple.

It aims to reduce risk, enhance returns, and achieve a good balance for stability in all market conditions.

Asset Classes

There are many asset classes, even beyond what you will see below.

However, the first step in diversification is understanding the main different asset classes.

These include:

Equities
Bonds
Cash
Real Estate
Commodities

Equities represent ownership in a company, and bonds are loans to governments or corporations.

Cash includes savings accounts and money market funds.

Real estate investments are in property, and commodities invest in other physical assets like gold or oil.

How Do You Diversify?

There are many methods of diversification, including between sectors, geographies and within asset classes themselves.

Sector Diversification

Investing in various sectors would mean spreading risk between sectors such as technology, healthcare, energy. and consumer goods.

Each sector offers different advantages (and disadvantages) such as high growth but volatile, steady but less growth, etc.

Geographical Diversification

Geographical diversification does what it says on the tin; spreads risk between different countries and regions.

This can help with risk associated with economic and political instability.

Domestic investments include those within your country of residence.

International investments include exposure to global markets.

Diversifying Within Asset Classes

Diversifying within asset classes helps you differentiate between large-cap stocks, small-cap stocks, growth stocks, or value stocks.

Large-cap are generally established companies, small-cap are, you guessed it, smaller companies (but with high growth potential and more risk), growth stocks are those that are expected to grow faster than the market, and value stocks are companies trading below their intrinsic value.

Investment Funds

Investment funds like mutual funds and exchange-traded funds (ETFs) are excellent tools for diversification.

They pool money from many investors to buy a broad range of assets, providing instant diversification often at a very low cost.

How Much Diversification Is Too Much?

This question is an entirely new article in itself!

There are many debates over how much is too much, but one thing is for certain: it depends on your personal circumstances.

If you want to know the answer that is best for you, make sure to get in touch with us today and book your initial, no-cost and no-obligation meeting.

Your successful financial future awaits!

Send us an e-mail to contactus@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.

Diversification: Investing in an Unpredictable World

“Know what you own, and know why you own it” – Peter Lynch

2 min read

Diversification: Investing in an Unpredictable World

“Know what you own, and know why you own it” – Peter Lynch

2 min read

Why is diversification an important part of investing? In practical terms, diversification is holding investments that will react differently to the same market or economic event. Generally speaking, there are four broad asset classes: cash, fixed interest (bonds), property and shares (equities). Since performance in any one asset class can be unpredictable depending on shifts in the market, investing across several asset classes can provide greater diversification potential. Therefore, if one asset class performs favourably, it can potentially offset another that is performing less favourably, providing more balance to your portfolio when market shifts occur.

Range of Assets

One of the most effective ways to manage investment risk is to spread your money across a range of assets that, historically, have tended to perform differently in the same circumstances. This is called ‘diversification’ – reducing the risk of your portfolio by choosing a mix of investments. In the most general sense, there are many adages: ‘Don’t put all of your eggs in one basket’, ‘Buy low, sell high’, and, ‘Bears and bulls make money, but pigs get slaughtered’. While that sentiment certainly captures the essence of the issue, it provides little guidance on the practical implications of the role that diversification plays in a portfolio. Therefore, though it may sound simple, ultimately, there is no such thing as a ‘one-size-fits-all’ approach.

Spreading Your Investments Within Asset Classes

There are four main types of investment, known as ‘asset classes’. Each asset class has different characteristics, advantages and disadvantages for investors, with the main ones detailed below.

While it cannot guarantee against losses, diversifying your portfolio effectively is vital to achieving your long-term financial goals whilst minimising risk. Although you can diversify within one asset class – for instance, by holding shares (or equities) in several companies that operate in different sectors – this will fail to insulate you from systemic risks, such as international stock market volatility. Another example of diversifying within asset classes would be corporate bonds and government bonds as they can offer very different propositions, with the former tending to offer higher possible returns but with a higher risk of defaults, or bond repayments not being met by the issuer.

Diversify Across Assets Valued in Different Currencies

Effective diversification is likely to allocate investments across different countries and regions in order to help insulate your portfolio from local market crises or downturns, as we’ve been seeing recently. Markets around the world tend to perform differently day to day, reflecting shortterm sentiment and long-term trends.

There is, however, the added danger of currency risk when investing in different countries, as the value of international currencies relative to each other changes all the time. Diversifying across assets valued in different currencies, or investing in so-called ‘hedged’ assets that look to minimise the impact from currency swings, should reduce the weakness of any one currency, significantly decreasing the total value of your portfolio.

Creating a More Effectively Diversified Portfolio

Achieving effective diversification across and within asset classes, regions and currencies can be difficult and typically beyond the means of individual investors. Individual funds often focus on one asset class, and sometimes even one region, and therefore typically only offer limited diversification on their own. By investing in several funds, which between them cover a breadth of underlying assets, investors can create a more effectively diversified portfolio. Multi-asset funds hold a blend of different types of assets designed to offer immediate diversification with one single investment. Broadly speaking, their aim is to offer investors the prospect of less volatile returns by not relying on the fortunes of just one asset class.

Shape Your Personal Financial Journey

There is no crystal ball, and so in such unpredictable times we are here to help you shape your personal financial journey. We take the time to understand your ambitions and support you to achieve them through our long-term thinking and expertise borne of experience.

To find out more, please get in touch today and book your initial, free, no-obligation meeting. Send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84.