Diversify your egg basket this Easter!
Easter has us thinking about the old saying "don't put all your eggs in one basket". Have you ever observed children comparing their basket takings after an easter egg hunt? Our quick survey indicates that given the option between one big egg and many little eggs kids will choose to diversify with the little eggs. Imagine the horror if a child chose one big egg, then the flavour was disappointing – maybe dark chilli chocolate. A diverse array of sizes, colours and flavours will yield the most joy.
An investment portfolio is much the same. If we put all our ‘eggs’, our money, into one investment class, not only do we miss out on the diverse investment experience of a broad array, our risk exposure to that one class may be significant.
Often, when one asset class or market, such as Australian shares, is performing well, another class may not. It may, for example, have an inverse relationship to the equities market or it might just be at a different stage in its performance cycle. Most of the time, investments are cyclical in nature and each class has a slightly different cycle.
In times of uncertainty such as the recent pandemic, fluctuations will be unique for the different types of investments. It is important to hold assets that behave differently during the investment cycle; assets with a more defensive objective may outperform share markets during a downturn. Therefore, at these times, like any other, diversification or having a few ‘eggs’ in each of these markets becomes very important.
So what does this really mean?
Diversification helps us to ‘smooth’ out your returns, by offsetting the high and lows of the different assets against each other to create a more even return over time. The idea is that you might miss out on some of those extraordinary high returns but also the extraordinary low ones too.
Similarly, utilising the skills and different investment styles of a variety of fund managers, is beneficial to investors. Whilst investing is not an exact science, Investment Managers can look at the same data set and come up with different forecasts and expectations of performance in asset classes and companies. Having exposure to a broad set of these differing styles and methods gives us potential to benefit from all of them or in the worst case, reduce our losses in any one of them.
At Serendipity Wealth Advisors, our portfolio recommendations not only include this diversity, but also take into consideration personal preferences and appetite for risk, when investing. We believe it is this analysis and expertise that contributes to our strong portfolio construction, setting our clients up to succeed for the future.
We wish you a Happy Easter!