Updated: Jan 17
Investment is a Balancing Act
Diversification is key to investment success and a good portfolio is always a balanced portfolio. Diversification is a technique which involves spreading an investment portfolio across various categories including region, sector, asset type. This is done to maximise the returns in various markets while managing the risk of the portfolio as a whole.
This is not some obscure financial technique. It merely means achieving a spread of investments – in other words, not putting all your nest eggs in one basket. 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 regions allows us to reduce our portfolios’ exposure to geographically specific risks, such as Brexit. This allows us to 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, for example emerging/frontier markets have 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 to manage the risk of portfolios by changing our allocation to reflect our stance towards the market. We see each asset type as a tool to manage our portfolios, each has its own strengths 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 to 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.