For an individual investor, knowing how to allocate our investments across different assets like; local equities, global equities, local and global bonds, credit, property, cash, and even hedge funds is an important yet potentially intimidating task. Good investment planning includes the diversification of your portfolio, by combining different assets to reduce risk. This safeguards our investments because the returns of different asset classes vary year on year. What this essentially means for an investor is that instead of investing in a single company share, unit trust/fund, industry, or sector, we should spread our exposure across a number of these. No one can be certain of future investment returns. Therefore, the best way to combat this uncertainty is to implement a wise investment spread across asset classes.
The key to implementing successful portfolio diversification is not simply selecting different assets, but rather holding assets that behave differently from one another. This is known as correlation. Correlation will carefully examine the relationship between return movements among two or more assets. Watch a short explanation video on correlation.
In global and South African financial markets, the importance of diversification has been highlighted for us through recently experienced volatility. Diversification of your assets is a vital role in investment success and consequently, allows us the ability to meet our investment goals. By doing this, if a particular sector, industry, or company investment takes a downturn, other investments inside your portfolio could outperform or lighten the load of the loss.
What is volatility?
Different asset classes hold varying levels of risk. Growth or Risk Assets, like shares and property, prove to outperform other asset classes in the long run, but they hold greater risk. This means that they typically need more time to recover from potential dips experienced in the shorter term. When considering the asset classes which we would like to hold as an investor, our duration of investing is extremely important. In other words, asset classes, time, and investment return are directly linked. If we wish to achieve a specific return goal, we need to not only invest in the correct assets but also stay invested for the appropriate timeline in order to achieve it.
Research indicates that over time, 90% of investment return is derived from the appropriate selection of asset allocation. This indicates that for individual investors greater importance should be placed on selecting correct exposure to asset classes, rather than picking individual shares and securities. For an individual investor, it can become a dauntingly large topic to unpack, understand and implement into our investment portfolios. When looking at the vast array of options, we may ask ‘where does one start?’.
Fortunately, this is not something that investors need to worry about because our fund managers are available to do that job in excellence for them. Fairtree Multi-Asset Funds are designed strategically to combine different asset classes on behalf of individual investors. Bespoke or Tailored portfolios are also available. This ensures that the appropriate level of diversification is applied to meet an investor’s specific goal.
Investors can set their goals today, by engaging with our Investment Solution Filter and consultants to find something to meet their needs.
– Cephas Dube & Kheara Lugg
Article Credits
https://www.prudential.co.za/insights/articlesreleases/diversification-get-the-balance-right/