Diversification: Can you avoid putting all your eggs into one basket?

Stephan Bernard an analyst at Allan Gray

Between the ongoing war in Ukraine, increasing inflation, and an uptick in global COVID-19 cases, as well as talk about a possible worldwide recession, there are several factors that are making the world a very uncertain place for investors. How do you invest today when everything seems out of kilter? And, if another crisis comes along, can you invest now to be crisis ready?  

“You’ve heard the saying countless times that you shouldn’t put all your eggs in one basket. This holds true for investing,” says Stephan Bernard an analyst at Allan Gray. “Having a diversified portfolio protects you against uncertain outcomes.”  

Bernard says that extreme situations – like what we are experiencing at the moment – make us feel like we have to do something different to respond to the current moment; but often the best course of action is to stick to the basics and follow the logic that has proven to pay off over long time periods. 

“This involves considering your objectives and investing in a range of assets – such as equities, bonds, cash and property across geographies – that can deliver returns under different circumstances, while keeping some cash aside for unforeseen expenses,” he says.  

He says balancing or diversifying a portfolio allows you to take advantage of different opportunities across the different asset classes.  

“But creating this balance can be challenging.”  

He says that choosing a multi-asset class unit trust is one way to ensure a good mix of assets. But it is also a good idea to have the right mix of investments to take care of your different needs.  

“A balanced fund may be a suitable choice for a long-term objective such as saving for retirement, while a low-risk money market fund may be a good parking place for money you may need to access quickly – for example, as a piggy bank for emergencies.”  

He adds that preparing for the unexpected is the hallmark of a diversified portfolio.  

“Recent world events, such as the Ukraine-Russia conflict and the COVID-19 crisis have reinforced the importance of building robust investment portfolios that can protect capital in different scenarios. COVID in particular has reminded investors of the need to plan for both short and long-term financial needs,” he advises.  

“If you only have long-term investments and need access to cash, you run the risk of having to withdraw at an inopportune time, locking in losses. History has shown that a recovery should follow a downturn, so if you can remain invested, you give yourself the opportunity to earn returns when they come. Having an emergency fund is one way of ensuring that you don’t have to draw on your long-term investment at the worst possible time – thereby protecting the ‘engine’ of your wealth.” 

Formulating an investment plan can be a daunting task. “A good, independent financial adviser can help you to assess the best investment options for your needs and circumstances,” concludes Bernard.

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