How to Build a Diversified Investment Portfolio

Storing all your investment eggs in one basket is no way to grow your wealth. Here’s how to diversify your portfolio to meet your financial goals. 

It’s the first thing they teach you in Investment 101. If you want to balance risk and reward, mitigating the former while optimising the latter, you need to diversify your assets. But while that may seem like a simple strategy, the truth is that a well-diversified investment strategy is complex, and in itself is no guarantee of profit or against loss. 

The old saw of “don’t put all your eggs in one basket” applies here. But you need to get that right: it’s not a case of putting lots of different-coloured eggs into one basket; it’s more a case – if you follow the metaphor – of putting your eggs into many different baskets. “It still amazes me how many people have heard this term a thousand times yet are still not diversified,” says Steve Brooks, Training and Development Manager at Carrick Wealth. “Diversification includes geography, currency and asset class.” 

In consultation with your trusted financial advisor, you could aim to achieve diversification by using all or some of those approaches.  

Look beyond local 

Geographic diversification is especially important for African-based investors. South Africa’s economy, for example, makes up barely 1% of the global market, so if you’re not looking beyond the nation’s borders you’re missing out on – quite literally – a world of opportunities. The varying economic profiles also make a huge difference: emerging markets like South Africa and Brazil promise high growth and high risk; while developed markets like the United States and United Kingdom promise lower growth but lower risk… at least, in theory. 

Again, it’s not a matter of “either-or”; it’s about trying to get the best of both worlds. “Your offshore strategy should always fit in and blend with your local strategy,” advises Carrick Wealth Director Mike Fannin. “It should take into account your existing exposure in terms of equities, bonds, property, commodities or cash. You should have a balanced portfolio, designed with a specific, clear target.” 

Fannin says that finding the right mix between investing local and offshore depends on your individual circumstances and requirements. “But as a rule of thumb, at Carrick we are comfortable with a split of two thirds offshore (consisting of long-term savings and some medium-term discretionary savings), and one third onshore (made up of the investor’s residential property plus local provident and retirement funds and company shares if the client is a business owner),” he says. 

Diversified for your needs 

There are so many investment opportunities available, the biggest challenge ought to be trying to pick where to put your money. Yet many investors don’t understand that, and miss out on those opportunities. For example, if your only exposure is to the JSE’s All-Share Index, you’re limiting yourself to one index (dominated by one media company) in one currency in one emerging market.  

Speak to your Carrick Wealth advisor about expanding that exposure to a broader mix of assets, assets classes, currencies and geographies, and creating a well-rounded, diversified investment portfolio that’s aligned to your unique investment time horizon, financial goals, and risk profile.