Diversification – the opposite of having all your eggs in one basket – is key to optimising investment returns over the long term. But achieving a well diversified portfolio is not as simple as having a wide range of investments; it requires careful thought and ongoing monitoring.
While on the face of it the concept is simple enough, to structure a well-diversified portfolio requires some effort and thought. There are different ways of diversifying your investments, depending on your investment goals and time horizon.
Higher-risk investments, such as equities and listed property, are necessary in a long-term portfolio for achieving above-inflation growth. However, the risks associated with these asset classes need to be carefully managed, and diversification is key to managing risk. Lack of diversification leads to concentration risk, the investment industry term for having all your eggs in one basket.
In an article for Forbes magazine, “How diversification works, and why you need it”, Rob Berger and Benjamin Curry explain that diversification is not designed to maximise returns in the short term. “At any given time, investors who concentrate capital in a limited number of investments may outperform a diversified investor. Over time, however, a diversified portfolio generally outperforms the more focused one,” they say.
In Money Matters, brought to you by Alexander Forbes, Lebo Thubisi, the head of manager research at Alexander Forbes Investments, explains to Dhivana Rajgopaul how diversification works in investing and what you as an investor should look out for to tell whether a portfolio is well diversified.
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