Your Investment ‘Golf Bag’: Why Diversification Matters
Think of managing your investment portfolio like playing a round of golf on a championship course. You wouldn’t expect to play effectively using only a driver or only a putter, would you? That’s why golfers carry up to 14 different clubs – each designed for a specific purpose, distance and terrain. Whether you need power off the tee, accuracy on the fairway, finesse around the green, or precision on it, having the right club is essential.
Similarly, a robust investment portfolio needs a range of different assets – your financial ‘clubs’. This is the essence of diversification. Each asset class (equities, bonds, property, commodities, cash) and sub-category (like local vs global stocks, or different types of bonds) behave differently under various market conditions. Having a diversified mix helps you navigate the unpredictable cycles of the financial markets. Just as in golf, achieving your best long-term financial score requires practice (sticking to the plan), endurance (weathering volatility) and time (allowing your strategy to work).
Shifting Conditions: Why Diversification is Crucial Now
For much of the last decade, it might have felt like one ‘club’ – specifically US stocks, led by the technology sector – was doing most of the heavy lifting, delivering outstanding returns globally. This sometimes made the benefits of diversification seem less apparent.
However, market leadership concentration rarely lasts indefinitely. Now may be precisely the time when a truly diversified strategy becomes crucial. We believe it’s wise not to be overly concentrated in any single area. Diversifying globally incorporating international stocks can be advantageous. Historically, US and global markets don’t always move in perfect unison, so it offers a potential buffer. Furthermore, shifts in global trade and currency dynamics, like a potential pullback in the US dollar, could provide a tailwind for international investments.
Beyond diversifying your stocks, it’s also vital to diversify your diversifiers. These are the assets you hold to potentially ‘zig’ when equities ‘zag’. Given the current economic uncertainties, it’s hard to predict which specific asset – be it cash, bonds, commodities or low-volatility stocks – will provide the best counterbalance at any given time. Therefore, spreading exposure across several types of these stabilising assets makes strategic sense.
Embracing Opportunity
Market downturns and periods of volatility, while uncomfortable, should be viewed through the lens of long-term opportunity. This may allow disciplined investors to acquire quality assets at more attractive prices – essentially buying valuable ‘clubs’ when they are on sale. This reinforces the ‘marathon’ approach: using bumps in the road to strengthen your position for the long journey ahead. Encouragingly, building a well-diversified portfolio is more feasible and cost-effective today than it has ever been.
Staying the Course
Remember, our goal is to help you navigate the entire course, not just the first few holes. A well-diversified strategy, combined with patience and discipline, remains the most reliable path to achieving your long-term financial goals.
