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Why should one diversify their portfolio?

Diversification is one of the most important components of reaching long-range financial goals while minimising risk.

Many investors may not be aware of the benefits and importance of a diversified portfolio. While a diversified portfolio may not guarantee against loss, it is one of the most important components of reaching long-range financial goals while minimising risk.

What is diversification in the investment industry? It is a technique that focuses on reducing risk by allocating investment funds across various financial instruments, industries, companies, and other categories. It is important as it avoids the unwanted risk that could come from “putting all your eggs in one basket.” There will be periods where some of your holdings will lose money and when that happens you will need other investments to offset the decline. Diversification is important as it keeps any part of your investment assets from being too heavily weighted towards one company or sector.

In order to balance risk and reward in your investment portfolio, one would have to diversify their assets. This is done by spreading one’s portfolio across several asset classes. Diversification helps mitigate the risk and volatility in one’s portfolio and has the potential to reduce the amount and severity of ups and downs.

Below are different portfolios one can use to diversify their investment portfolio when investing with Global & Local:

Equity portfolios

  • General portfolios: These portfolios are invested in certain shares within various industry groups as well as across smaller, medium, and large market capitalisation shares. Managers of these portfolios might use different investment styles and approaches, but their goals are to generate a risk/return profile that is comparable with the risk/return profile of the JSE equities market.
  • Equity funds will have a minimum exposure of 80% to listed equities.

Multi-asset portfolios

These are portfolios that are invested in various investments in the equity, bond, cash, and property markets, to generate the best possible returns over the long term.

  • High equity portfolios: These portfolios tend to have short-term volatility and aim to maximise capital growth in the long term. These portfolios can have up to 75% of the market value of their portfolio invested in equity and up to 25% of the market value of the portfolio invested in property.
  • Income portfolios: These portfolios invest in a variety of equity, bond, money market, or real estate markets, and their primary objective is to maximise income. These portfolios can have up to 10% of the market value of their portfolio invested in equity and up to 25% of the market value of the portfolio invested in property.
  • Fund of funds portfolios: These portfolios are pooled investment funds that are invested in other types of funds. This means the portfolio contains different underlying portfolios of the unit trusts managed by various fund managers. The Fund of Funds strategy aims to achieve broad diversification and appropriate asset allocation.

Interest bearing portfolios

Interest bearing portfolios can be defined as collective investment portfolios that invest only in bonds, money market instruments, and other interest-earning securities. Estate securities, equity securities and cumulative preference shares are not included in these portfolios.

  • Variable term portfolios: These portfolios generally invest in short, intermediate, and long-dated securities. The composition of the underlying investments is actively managed and will change over time to show how the manager has assessed interest rate trends. These portfolios can result in capital growth and can generate a regular to high level of income.
  • Money market portfolios: These portfolios aim to maximise interest income, preserve capital, and provide immediate liquidity. These portfolios are considered to be highly liquid, short-term vehicles.

Real estate portfolios

  • General portfolios: Listed property shares, collective investment schemes in property, property loan stocks and real estate investment trusts form part of real estate portfolios. These portfolios aim to provide high levels of income and capital appreciation over the long term. Anything up to 80% of the market value of these portfolios is invested in shares listed on the South African Listed Property Index. A minimum of 10% may be invested in shares outside the defined sectors in companies that conduct business similar to the business conducted by those in the defined sectors.
  • Global portfolios: These portfolios are defined as collective investment portfolios that have 80% of their assets invested outside South Africa with not more than 80% exposure to assets of a specific geographical area.
  • Equity – general portfolios: Selected shares from equity markets are invested in general portfolios. There are not limited to a certain theme or investment style and will be invested across various market sectors as well as across small, medium, and large market capitalisation shares. These portfolios offer medium to long-term levels of growth as their main objective.

Even though a diversified portfolio does not necessarily mean “no losses,” investors should always seek exposure to diverse types of assets so that they are not dependent on one asset class and will not be hugely affected if that asset class performs poorly. The portfolio will be a hedge against inflation and in some cases, might protect the investor against a financial crisis.

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Michael Haldane

Global & Local The Investment Experts

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