Diversify, diversify, diversify: How to get ahead in investing

The number one rule of investing is simple: don’t put all your eggs in one basket. As the financial crisis of 2008 showed, it’s an easy one to overlook.

“Unfortunately many people in Ireland will have memory of not being sufficiently diversified in the financial crisis, when a huge amount of private wealth was lost through the holding of bank stock,” says Daniel Moroney, investment strategist at Brewin Dolphin, one of the county’s leading wealth managers.

With cheaper-than-ever transaction costs and ease of access to index funds, it has never been easier to spread your investments across sectors and asset classes.

“The good news is that having a diversified portfolio is not rocket science, it’s not expensive and it’s easier to achieve than ever,” he says.

A range of funds are available to allow individual investors access a diversified portfolio

As ever with investments, the best advice is to take advice. After all, some investors may look to diversify across equities, but which ones? Others may be more conservative and look towards different exposures. So even within the broad rule, diversification can mean different things to different people.

Just don’t mistake diversification with chopping and changing. Constantly reacting to what is happening right now – whether it is a pandemic or a trade war – is rarely the best approach. “There are always areas of concern. Just stick with your long-term investment principles as, over time, these have stood the test of time,” he says.

A range of funds are available to allow individual investors access a diversified portfolio. “Though not risk free by any means, they are relatively safe and very transparent and ideally teed up for retail investors,” says Paul Stewart, lecturer in financial services at Ulster University.

A lot of these products are designed to reflect what the market is doing, and so, although they fell in the early part of the pandemic, they have since recovered a good deal of ground. “The essence of diversity is that when one company takes a hammering, another breaks your fall,” he says.

Kevin Quinn, chief investment strategist at Bank of Ireland, says: "A well-diversified portfolio may not eliminate risk but it will certainly reduce it and will serve to deliver better more predictable returns from a wider portfolio."

Tolerance for loss

There are several ways to create a diversified portfolio. These include spreading your investments across the asset classes and varying the portion depending on your return objectives, time frame and tolerance for volatility or loss.

The merits of investing for the long term are well understood, but the ability of most investors to exploit this trend is limited

“This year we’ve seen the benefit of this when equities fell so heavily and fixed income held up well. Even now, despite such low rates, fixed income markets have delivered about 4 per cent YTD [year to date] whereas global equities are marginally negative – so a lower-risk investor would have been very well cushioned,” says Quinn.

Diversify within asset classes, such as investing in shares within different sectors. “This would mean ensuring you have a well-balanced share portfolio representing the major sectors such as IT, healthcare, financials, consumer stocks etc. In 2020 we saw the value of this with IT booming by greater than a 20 per cent YTD whereas energy stocks have lost more than 35 per cent ,” he says.

Invest in local and international markets. “Investing in 32 properties in 32 counties isn’t diversifying. Rather than just having money invested in Irish or even European markets, look at overseas markets as well. This is because different markets can operate on their own economic cycles as well. Again this year we have seen this in action, with the US now up circa 3 per cent whereas the UK is down almost 25 per cent,” says Quinn.

Investors should seek professional advice and frame their investment plan to include their expected returns, their appetite for risk and the length of time over which they can invest.

The long haul

The merits of investing for the long term are well understood, but the ability of most investors to exploit this trend and stay the course is much more limited, says Phil Byrne, deputy chief investment officer of Merrion Investment Manager, part of Cantor Fitzgerald Ireland.

“Poor initial portfolio construction leads to difficult decisions during the inevitable times of crisis. If your portfolio lacks true diversification, one mistake costs too much, thus preventing you staying invested over the longer term. What was once thought to be a well-diversified portfolio ends up being the same macro viewpoint just expressed through several different asset classes.”

The extreme example of the crash here still rings true, he says. “An investor with their wealth in their domestic Irish residence, Irish bank shares, Irish investment property and Irish government bonds on paper felt they were diversified, ticking all the boxes of bonds, equities, property and so on. The global financial crisis highlighted one giant correlated bet that excessive leverage obliterated,” he says.

Beware a whole industry dedicated to highlighting risks, he cautions. “Countless commentators, bloggers and financial pundits are constantly extolling the latest fear as pseudo-intellectual heavyweights, which prevents people from wanting to invest. Meanwhile, global equity markets continue to compound higher year after year, driven currently by supportive government and central bank policies along with exciting industrial and technological change,” he says.

The reality is that the biggest risk for most individuals is a lack of a future pension. “With rates set to stay near zero for a long time, banks beginning to charge for deposits and the US federal reserve allowing inflation to run hot, what little savings people have will be eroded, in both real and nominal terms, at a quicker rate than most of us have ever experienced,” he says.