Diversification is key to investment success and a good portfolio is always a balanced portfolio.
This is not some obscure or complicated financial technique. It merely means achieving a spread of investments – in other words, not betting the ranch on one asset class, or not putting all your nest eggs in one basket.
The reasons underpinning this principle are straightforward. If you were to put all your money into one industry, or sector, or geographical region, you would be giving a hostage to fortune. If they do badly for any reason, then so will the value of your whole portfolio.
But, if you’ve put together a carefully chosen and balanced range of investments, then, not only will your exposure to one type of asset be limited, but often, falls in the value of one, will be compensated by rises in another, as other investors shun the poorly performing and drive up demand for alternatives.
At Reeves, diversification across various geographical areas allows us to reduce our portfolios’ exposure to region specific risks, such as, for example, Brexit. This means we can benefit from the growth potential of different regions, without fully exposing ourselves to the market risks that come with them. Alongside managing risk, looking at various regions gives us different opportunities, such as emerging/frontier markets, which might have a higher growth potential compared with more developed regions, albeit with higher risk and volatility.
As well as diversifying regionally, Reeves portfolios are also diversified across several asset classes. As different asset types act differently and carry different levels of risk it allows us the manage the risk of portfolios by changing our allocation to reflect our stance on the market. We see each asset type as a tool to manage our portfolios, each has its own merits which we use together to craft balanced portfolios to reflect each risk level
To further diversify and reduce the correlation of our portfolios we use different types of funds within the asset types. For example, a smaller companies equity fund will perform differently compared with an equity fund focused on larger cap companies. The aim is to add value through our fund selection, while further spreading the risk of the portfolio with funds which won’t necessarily react to global events in the same way.
It’s all a question of balance.