The beauty of diversification for investors in their wealth creation journey

What is a diversified portfolio? Why is it important?

As an investment strategy, a diversified portfolio aims to reduce risk by spreading investments across different asset classes ( the most common include equity, bonds, property and cash) and sometimes even geographic regions.

Let’s look at an example. What if you invested in property and property alone? If the property market took a sudden downturn, you could stand to lose a significant amount of money.

But if you had followed a diversification strategy and invested in other asset classes, you would diversify risk considerably. Of course, another way to have less exposure in the market is to invest offshore, which is often a consideration for South Africans.

Time in market’ versus ‘timing the market’ 

As an investor, it’s crucial to understand your savings and investing objectives as well as your time or investment horizon to create a stable risk profile.

The investment horizon is an important consideration and refers to the length of time that you plan to keep an investment before selling or disinvesting. Different investment types are better suited for different time horizons. The length of time you leave an investment can have a profound effect on your returns.

So what are your investment goals? These are personal and you should spend time alone or with your partner and family deciding what is important and aligned to your values and lifestyle - a goal could be anything from saving for a vacation, property, wealth creation and/or comfortable retirement.

When it comes to investment approaches, it's essential to consider factors like your life stage, income level and short- and long-term financial goals.

As a general guideline, it is important to establish an emergency fund and understand your liquidity needs before considering a long-term investment. For instance, if you want to purchase property in the next six to eight months, it is crucial to consider the cash flow required for this and then determine how much of your remaining funds can be allocated to long-term investments. Investing all your money in long-term investments while some of it required in the short-term may not be the best solution.

After making sure your emergency funds are in place and you have understood your liquidity needs as part of your planning, maximize your tax-free savings accounts and optimise your retirement annuity, taking advantage of the tax benefits.

Growth through unit trusts

Once you have taken care of the above, consider investing your funds directly in local or offshore unit trusts

The truth is that unit trust funds remain popular investment choices because they are easy to understand, easy to invest in and offer the long-term growth that most of us are looking for. Unit trust funds allow you to pool your money with other investors to invest in a range of assets such as shares, bonds and property.

At Investec, our unit funds are managed by some of the most skilled investment professionals, who possess a thorough understanding of the global markets and continuously make informed investment decisions on your behalf.

Let’s look at another example. If you only invested in the stock of a multinational mobile telecommunications company on the JSE, then your entire investment drops if that company’s stock drops.

When you invest in a unit trust fund, the risk is spread across other companies’ stocks (eg, a multinational media, technology company, an international energy company and so forth) and/or potentially other asset classes (e.g. bonds, property etc.).

In addition, when you invest in offshore markets, you can often shield your investment from market volatility in South Africa.

It’s worth noting that equities, generally speaking, have historically outperformed any other asset class in a 10-year economic cycle, giving a higher chance of beating inflation and maximizing returns.
 

Local or offshore funds – which is right for you?

This is why the role of a fund manager in putting together any unit trust fund is crucial – they take on much of the rigorous work for us as armchair or novice investors.

These financial bodies implement fund investment strategies and make investment decisions on an ongoing basis, while at the same time managing risk.

The fund manager team is made up of head or senior and other portfolio managers, analysts and strategists. At Investec, we have the benefit of a global team and expertise. In essence, these experts are responsible for ensuring that the fund remains invested in a way that aligns with the objectives of the fund and the kind of returns investors expect to see.

As an investor, you and a financial adviser should always take the time to look at the different types of unit trusts available to you that meet your needs and objectives.