The importance of a diversified portfolio
On this special day, where South Africans celebrate the diversified country filled with different flavours of people. Our different cultures and backgrounds drive the country forward and together we have achieved great feats.
This mirrors the importance of diversification in your investment portfolio.
Diversification aims to lower risk and maximize profits by allocating funds across different asset classes such as bonds, property, stocks, and mutual funds.
Having only 1 sector or industry make your portfolio can be very dangerous. The portfolio is now exposed to greater risks compared to a diversified portfolio. If negative news is released about the sector or industry, it will have a massive impact on your portfolio, and you will suffer from high volatility. The more uncorrelated, the better. Different assets such as bonds and stocks don’t react the same way to adverse events. A combination of asset vehicles like stocks and bonds will reduce your portfolio’s sensitivity to market swings because they move in opposite directions. Investors can achieve optimal diversification with only 15 to 20 stocks spread across various industries.
Harold Strydom, an investment strategist and portfolio manager at Citadel, said that investors should choose a combination of South and US equities which has historically delivered a superior outcome from both a risk and a return perspective than either alone. Investors who opted for a combination of both would have seen the best results, achieving real returns of 8% with a standard deviation (measures volatility) of just 15%.
There is a massive debate still going on amongst financial advisors and asset managers on whether Cryptocurrencies should be added to a portfolio. Some argue that you should be minimum of 10% of your portfolio into cryptos. Some say that it shouldn’t be apart of your portfolio due to its high volatility, little to no regulation and 0 intrinsic value.
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