How to Build a Diversified Investment Portfolio

2015-06-24 13:07

Diversify and improve your success when investing.

Many investors just want to make money from their investment. This is a great incentive because it causes you to be willing to risk your hard earned money in hopes of getting returns. In the investment world, all experienced investors know that the type of investments you make will determine how successful you become.

It is winter now in SA.  Imagine you own a shop and you only sell winter clothing and heaters. You would have great sales during this season, because it is cold and people will buy your goods, but your sales will be terrible in summer.

If you offered both winter clothing and summer clothing, in combination, then you'll probably do much better. You'll have something to sell in both winter and summer  seasons. That's similar to how diversification works. You want to combine assets that are desirable individually, but work better together because they perform well in different circumstances.

Different asset classes can do well in different economic environments. If growth is booming in China and commodity prices are rising then South African and other emerging market stocks are likely to do well. If European growth is falling — maybe because of the Greek effect and general slowdown in EU’s biggest economies, then EU bonds do well. Many different factors such as war, oil prices, and inflation rates impact investments. Sunburst Africa construct portfolios from 10 different assets which we believe helps maximize your return and helps hedge risk. Sunburst Africa uses a set of low-cost ETFs to do this. You can join Sunburst Investment community and get personalised diversified investment recommendation.

There are two levels of diversification:

Firstly, diversification can be done by asset class. Different asset classes do well in different economic situations as I explained earlier. The main asset classes used at Sunburst Africa are stocks, bonds, real estate and inflation protected securities. Together these should offer growth, and also the opportunity to preserve capital in weaker markets.

Secondly, diversification can be done by location or geography. Things may be great in the US, but bad in Greece as is the case currently. Having broad international exposure can help manage this risk and expose you to bull markets wherever they occur. It's important to have exposure in both developed and emerging markets across the globe. It can be tempting to weight the country you live in higher within your portfolio allocation, however, this can be a mistake. For example, if you live in South Africa, it would not be a good idea to hold just South African companies, when you could diversify globally and own a broader mix of companies.

Therefore, when investing, having a diversified portfolio should help smooth your returns over time without necessarily reducing them. I believe this makes it more likely that you'll be able to stay the course in the bad times. The key things to pay attention to when diversifying are asset classes and geographies. Merely adding more investments to a portfolio won't necessarily make it more diversified unless there are meaningful differences between the investments.

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