Is it time to abandon Diversification?

For many years it has been the accepted wisdom that you should diversify your investment portfolio. That means diversifying by types of investments – with say, your exposure to the stock market balanced by more cautious investments in bonds and, perhaps, funds that invest in property.

Common wisdom says you should also diversify geographically – making sure that you don’t have too much of your portfolio invested in one country or region but, at the same time, giving yourself the chance to benefit from stock market gains in other parts of the world. After all, depending on which statistical measure you use, the UK only accounts for between 4% and 5% of world stock market capitalisation.

All these points sound like simple common sense – and your Granny is nodding sagely and saying, “Don’t put all your eggs in one basket.”

Recently though – and particularly in the light of the turbulence caused by the pandemic – some analysts have started to question this approach. All diversification does, they argue, is guarantee that some part of your portfolio will make a loss. And if the early months of 2020 repeat themselves, all of your portfolio will make a loss. As one headline put it. “You can’t diversify your way out of a financial hurricane.”

Some investors may agree – the growing army of ‘Teslanaires’ (people who’ve done remarkably well out of Tesla shares) would be an example of the ‘just invest in one company’ approach.

You won’t be surprised to hear that there are flaws to this argument. For every Tesla there are a hundred companies where the share price goes in the opposite direction: but those stories rarely make the headlines. And people who are saving and investing for the long term and who are not professional investors simply do not have the time or the expertise for such a narrow approach. What’s more, they like to sleep at night.

We have always maintained that saving and investing is a long-term commitment. That achieving your financial planning goals comes not from finding the needle in the haystack, but from working consistently with your financial advisers: constructing a low cost, globally diversified portfolio that matches your risk profile and your long-term goals, and monitoring that portfolio regularly and consistently.

There will, inevitably, be good years and bad years but, over the long term, that approach has always paid off. As you know, we’re absolutely committed to our clients and their financial planning – and we’re absolutely committed to making sure they sleep through the night as well.

Sources

https://www.statista.com/statistics/710680/global-stock-markets-by-country/

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Garry Hale
MD & Certified Financial Planner

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May 10, 2021

Is it time to abandon Diversification? | HK Wealth