Just as in other parts of our lives, putting all — or almost all — of one’s eggs in a single basket can be disastrous when it comes to investing. It’s why I’ve sought to build a highly diversified shares portfolio.
There are many sectors that I can invest in to diversify and reduce my portfolio’s risk profile. Spending a high proportion of my cash in one type of company could cost me a lot if industry-specific problems come along.
Certain shopping centre operators have slumped in price, for instance, as a blend of Covid-19 lockdowns and the growth of e-commerce have smacked physical retail profits. Many diamond producers have sunk in value too thanks to growing demand for synthetic stones.
Cycle paths
My investment returns could also suffer if I decide to buy either either cyclical or non-cyclical shares. Economically sensitive (or cyclical) stocks could slump in price when times get tough. These sorts of companies include non-essential retailers, industrial metal producers, and airlines.
Defensive (or non-cyclical) shares, like utility companies or pharmaceutical manufacturers, might deliver poor returns versus the market average when economic conditions pick up.
Touring the globe
A good idea is also for me to diversify my portfolio according to geography. I can buy businesses that operate across a variety of different territories. Or I can buy a mix of stocks that all operate in separate regions.
Investing just in emerging market stocks could be a great plan. Surging wealth and population levels here could well supercharge profits at such shares. But then again, a slow economic recovery from Covid-19 compared with developed economies is a potential risk I need to consider.
Funds are popular
Research from AJ Bell’s investing app Dodl shows how important diversification is to investors right now. It says that a whopping 77% of its clients “are seeking more diversification via funds rather than direct shares”.
Dodl says that geographic diversification is particularly popular among its clients, too. Its ‘On Top of the World’ themed fund — a vehicle that invests in stocks across the globe — is its most popular fund right now.
My portfolio in action
As I say, I’ve taken steps to diversify my own portfolio as much as I can. In total I hold more than 20 different UK shares right now.
For example I’ve bought shares in three housebuilders (Barratt Developments, Taylor Wimpey, and Persimmon) to capitalise on the strong housing market. Problems that are specific to one company could significantly damage my returns. Owning more than one therefore reduces this risk.
I own stocks across many sectors, too. Mining company Rio Tinto, drink manufacturer Diageo, packaging producer DS Smith, and wargaming business Games Workshop are among my holdings.
Some of these companies are more cyclical in nature while others are less economically sensitive. What’s more, each of these individual shares operate all over the world.
Building a diversified portfolio can take a lot of time and research. Or it can be achieved more simply by investing in certain funds. Either way, taking a balanced approach is something I think will help seriously boost my long-term returns.