What Does A Diversified Portfolio Look Like?

A diversified portfolio is designed to spread risk by investing in a variety of assets, sectors, and geographical regions. The goal is to reduce the impact of any single asset or market movement on your overall portfolio performance.

1. What Is Diversification Through Geographical Regions?

This means spreading investments out over different economic regions. Geopolitical events that affect one region might not affect another, and markets in some regions react differently from others.

This helps to spread out risk in a portfolio. For example, North America (US and Canada), Europe and the UK, Asia, Africa, Latin America, North America & the Caribbean, the Middle East & North Africa and Australia & New Zealand, etc.

Regions could also be divided into emerging or developing markets like Asia and Latin America, and established markets like the US and Europe.

Emerging Markets vs Developed Markets

Developed markets like the US, Germany and Japan represent mature economies characterised by high GDP, advanced industrialisation and well-established service sectors. Financial markets tend to be large, robust and highly liquid and have reputable institutions like the NYSE and the London Stock Exchange.

Developing or emerging markets tend to have smaller, less liquid exchanges with fewer listed companies. These countries are in the early stages of economic development.

2. What Is Diversification Through Sectors?

Sectors are broken down into various categories, and investors can use sectors to diversify a portfolio, as they react differently to one another.

Types of Sectors

Information Technology – e.g. Microsoft, Nvidia, Meta, Amazon, etc.

Healthcare – e.g. Johnson & Johnson, Eli Lilly, Novartis, AstraZeneca, etc.

Financials – Bank of America, JPMorgan Chase, Berkshire Hathaway, etc.

Consumer Discretionary – Starbucks, LVMH, BMW, etc

Communication Services – Netflix, Walt Disney & Co., AT&T, etc.

Industrials – Boeing, KLM, SpaceX, FedEx, etc.

Consumer Staples – Kellogg’s, Walmart, etc.

Energy – Chevron, BP, Shell, etc.

Utilities – National Grid, Duke Energy, etc.

Real Estate – American Tower, WellTower, Realty Income, etc.

Materials – Anglo Gold, De Beers, Rio Tinto Group, etc.

3. What Is Diversification Through Asset Classes?

Asset classes are groups of investments with similar attributes that behave similarly in the market. Financial advisers use asset classes to diversify a portfolio. Asset classes have different investment risks attached to them.

Types of Asset Classes?

Stocks (Equities) – Growth potential; higher risk (e.g., stocks in companies)
Bonds (Fixed Income) – Stability and income; lower risk
Cash or Cash Equivalents – High liquidity (e.g., savings accounts, money market funds)
Real Estate – Physical property or REITs (Real Estate Investment Trusts)
Alternative Investments – Hedge funds, private equity, cryptocurrencies (more speculative)

Stock diversification within the equity portion:

It is possible to further diversify equities through:

By Market Capitalisation: Large-cap, mid-cap, small-cap
By Sector: Tech, healthcare, energy, consumer goods, financials, etc.
By Geography: Domestic (e.g., U.S. companies), International (developed markets), Emerging markets

Example:

40% U.S. large-cap (e.g., S&P 500 index fund)
10% U.S. small-cap
10% international developed
5% emerging markets

Bond diversification with the bond portion

Government vs. Corporate Bonds
Short-term vs. Long-term maturities
High-grade vs. High-yield (junk bonds)

Example:

20% U.S. Treasury bonds
10% investment-grade corporate bonds
5% municipal bonds

4. Example of a Diversified Portfolio Allocation

Moderate profile

Growth Profile

5. Things To Consider

Continuing Market volatility will affect allocation and composition, e.g. in extreme volatility as we are currently experiencing, investors tend to add more gold into their portfolio as a haven against volatility, or investors look for sectors that are flourishing due to geopolitical occurrences like defence stocks in Europe that are expected to boom as the EU ups their defence spending.

Avoid overconcentration (e.g., too much in tech or a single stock). This could be dangerous, because if there were a sudden fall in tech stock, a high weighting could cause huge losses.

Rebalance regularly to maintain target allocations. This means bringing the original weighting of the various assets back to what they originally were and back to the client’s original risk preference.

Match risk to your goals and time horizon. For example, if you were saving for retirement and had 30 years to save, you could increase the equities portion, giving a higher risk-reward ratio, as you have a long period to even out fluctuations in the market. A shorter period, like 5 years, does not have the time length to even out highs and lows in the markets, and there may be significant losses compared to a lower-risk savings account with bonds for less risk.

Diversification is essential for building a long-term savings portfolio that will mitigate risk and maximise earning potential. Always consult with a financial adviser before making any investment decisions.

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your adviser for a personal consultation.

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.