There is a noticeable thread running through our regular commentary, namely the benefits of diversifying your portfolio, but can diversification go too far? The reason why we diversify a portfolio is to avoid a scenario where all our investments lose value at the same time; or in a worst case scenario, to avoid a total loss of our wealth if one of our investments go broke. Most people consider investing in shares to be risky and investing in residential property to be safe. Shares got this bad rap mainly due to the fact that you can see their price bouncing up and down on a second-by-second basis, whereas the price of your house only becomes known once you try to sell it. On average, however, shares have been a much better investment than the house you live in, and if you disregard the subjective reasons for owning a house, the S&P500 has been the outright winner on risk versus return with a 95% chance of giving you a positive return over any 10-year period.
The correct way to use diversification is not to try to avoid volatility risk, but rather to avoid concentration risk. If you invest in the S&P500 index, your risk is spread among the 500 biggest and best companies in the USA. If you invest in only one share on the index, you have no margin for error. If you are someone who only wants to maximize returns, then any diversification would be counterproductive, but even if you are 100% sure about something, you can still be wrong and lose all your money.
We believe that there is more to portfolio management than just maximizing returns. We believe you should have peace of mind, even if it means that you get a slightly lower return over time; so we always consider two critical factors when proposing a portfolio: age and quality of income. If you are young, your investments have to be more concentrated in equities, which will give you better longer-term returns, because you have to build a portfolio that will get you to a point of being financially independent. If you are still generating a very secure income, you can also focus more on higher-return asset classes because you will not be dependent on your investments for quite a while. But if you are older and dependent on your investments to provide you with an income, or your job security is not high, there has to be an element of diversification in your portfolio.
At the end of the day, you have to trust us to take calculated risks on your behalf. Get onto the roller coaster we propose and experience the excitement of the ups and the downs, the screams and the laughs, knowing that you will arrive safely at the end of it all; instead of just spinning around in the teacups all your life.