The Best way to diversify a portfolio, and how, revealed. We have conducted extensive research into the best ways that South Africans could diversify their investment portfolio and how.
This is a complete guide to how to diversify a portfolio and how.
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In this in-depth guide, you’ll learn:
- What is Portfolio Diversification?
- What are the benefits of diversifying your investment portfolio?
- The Best Way to Diversify Your Investment Portfolio Step by Step
- Popular Examples of Diversified Portfolios for South Africans
- What is Over-Diversification, and How Can Investors avoid this?
- How to Choose the Right Stockbroker in South Africa
- The Best Share CFD Brokers in South Africa
The Best Way to Diversify My Portfolio in South Africa – 9 Key Point Quick Overview
- ✅ What is Portfolio Diversification?
- ✅ What are the benefits of diversifying your investment portfolio?
- ✅ The Best Way to Diversify Your Investment Portfolio Step by Step
- ✅ Popular Examples of Diversified Portfolios for South Africans
- ✅ What is Over-Diversification, and How Can Investors avoid this?
- ✅ How to Choose the Right Stockbroker in South Africa
- ✅ The Best Share CFD brokers in South Africa
- ✅ Conclusion
- ✅ Frequently asked questions
What is Portfolio Diversification?
Diversification reduces risk exposure by spreading capital across many asset classes within a single portfolio. The goal of a diversified portfolio is to reduce the impact of market fluctuations by holding a wide range of asset classes and investment vehicles.
The theory underlying this strategy is that a diversified portfolio would have lower overall risk and greater long-term returns than any one asset or security would on its own.
Maintaining a diverse portfolio of 25–30 equities has been proved in studies and mathematical models to provide the most cost-effective risk mitigation at the lowest possible cost.
Adding additional securities to an investment portfolio does provide diversification advantages but at a much lower pace.
The strong performance of certain assets may offset the bad performance of others, which is one of the main goals of diversification. However, only if the assets in the portfolio react differently, and often in opposite ways, to market pressures can the advantages of diversity be realized.
What are the benefits of diversifying your investment portfolio?
Investing in high-return instruments is common practice. However, doing so might cause you to put all your eggs in a single basket. Investments in assets with strong returns often result in a premium purchase price.
According to any reasonable risk-reward analysis, the danger is just as great as the potential reward. This is when having a diversified portfolio comes in handy. The key to an efficient investing strategy that keeps risk low is diversification.
Considering the market volatility, having a diversified portfolio over several financial instruments and sectors is important. Some of how a diversified portfolio helps to lower investment risk are listed below.
It can help compound interest
Investing in a mutual fund might be the way to go if you want to take advantage of compound interest.
This implies that not only will the initial investment amount but also the accumulated money from prior years’ investments earn interest. You should remember that diversification only makes sense if the holdings of the funds you invest in are distinct.
South Africans spend less time monitoring their investment portfolio
Since not all holdings in a diverse portfolio would experience poor returns simultaneously, the portfolio overall is more secure.
If you have put all your money into stocks and shares, you will need to spend much time monitoring the market and planning your next move.
For instance, if you have only invested in low-risk mutual funds, your constant concern will be finding ways to boost returns.
Diversifying your portfolio will allow you to devote less time to managing it. Subsequently, it will reduce the amount of work you need to put into it.
South African investors can have more peace of mind
Diversification’s greatest benefit is the assurance it provides. Diversifying an investor’s money across various asset types might help them relax about their financial future.
South Africans can more effectively safeguard their capital
However, not all investors are willing to take such a chance. Early-stage or retirement-bound investors value portfolio stability and diversification’s security for their financial futures the most.
By spreading their money across many assets, investors may reduce their overall exposure to risk and yet get the benefits of their investing strategy. It is also a way to reduce risk in the face of the market’s inherent uncertainty.
Investors can easily achieve their investment objectives
Investors need to spread their money around to several high-performing industries. The investor’s stock profits may increase if market volatility has a beneficial effect on the stock price.
If it helps reduce debt, the investor can easily make the most of their mutual fund investments.
It can help buffer the effects of market volatility
The potential for loss is cut down considerably when a portfolio is well-diversified. The overall effect of market volatility is mitigated by spreading the investment over various asset classes and industries.
Having holdings in a variety of funds helps mitigate dangers associated with a company’s or sector’s specialized operations. So, it lessens dangers and increases long-term profits.
Investors can shuffle their investments more easily
Every investor should take advantage of diversification because of its usefulness. By doing so, they can better respond to market fluctuations. It enables shareholders to boost yearly returns by investing in many asset types.
It can help South Africans benefit from different financial instruments
Mutual funds allow investors to diversify their portfolios by purchasing debt and equity. Similarly, the return is guaranteed with fixed deposits, and the risk is minimal.
Therefore, spreading your money around will reduce your exposure to potential losses and increase your chances of making a profit. Of course, fund performance is important, but gains in other funds can offset losses in underperforming ones.
The Best Way to Diversify Your Investment Portfolio Step by Step
Past and present economic events highlight the need to diversify your holdings. Unfortunately, those who “place all their eggs in one basket” are more likely to lose money in a down market.
Long-term success can be achieved using smart, consistent, and disciplined investment behavior, regardless of the market conditions. Below we discuss the many ways through which South Africans can diversify their investment portfolios
Learn why you should diversify your portfolio
With a well-balanced portfolio, your assets will be better able to weather the storm of any economic crisis.
However, diversity extends within each class of assets, not only the kind of investment or classes of securities. So put your money to work in various sectors, interest rates, and more.
Learn about the global markets
The potential for profit in the international market is substantial. However, these markets are often characterized by a high degree of volatility and the presence of many sets of monetary restrictions that an investor must navigate.
It might take a while for a new investor to grasp how the market works, identify patterns and swings, and figure out what motivates these changes.
However, it could be quite profitable, particularly during periods of prolonged depression in the market.
To get started, choose a mutual or exchange-traded fund (ETF) with a low expense ratio and is actively traded. With this method, you can invest a small sum of money without risk, opening a world of possibilities for learning about and gaining experience in the international financial markets.
Familiarize yourself with the different asset classes
Stocks, bonds, and commodities are all examples of the many asset classes. Similar qualities and market behaviors across investments are used to categorize them into the same class.
A varied investment portfolio begins with a diversified set of investments. The key asset classes are as follows:
- Equities (stocks): enable investors to own a portion of a firm.
- Fixed-income securities (bonds): investments in which investors lend money to a corporation or government for regular interest payments.
- Cash consists of liquid assets or accounts that are easily accessible. This comprises certificates of deposit with a short maturity, money market accounts, checking accounts, and savings accounts.
- Alternative investments, such as real estate, commodities, and hedge funds, correlate with the stock market, which is normally lower than the stock market.
The risks involved with each asset type are distinct, as are the possible rewards. Therefore, if your objective is to limit risk and increase profits, you should diversify your asset allocation.
When a portfolio has a healthy amount of diversification across asset classes, the underperformance of one asset may be compensated by the outperformance of another asset, possibly decreasing the portfolio’s overall risk over time.
Assess the qualitative risks of stocks before you invest
Before purchasing or selling any investment, the risks should be analyzed. Multiple factors are considered when assessing risk, including past results, corporate structure, adherence to rules, and even the value of a company’s name.
You are comprehensively analyzing the firm to provide you with enough information for speculating on whether its stock price will rise or drop.
Numerous investment applications, websites, and other sources can conduct research on your behalf. Although due diligence should always be performed, many investors depend on the insightful research offered by highly competent investment analysts.
Understand what drives prices in financial markets
Before investing in financial markets, it is necessary to comprehend the variables that impact their movement.
The term “financial markets” encompasses more than just stock and currency exchanges; it also refers to bond, money, and interbank markets.
This is a market for financial instruments, and like any other market, it is driven by demand and supply. Like any other market, its movements are influenced by external variables like as interest rates and inflation, among other factors.
Understand your own financial biases
When planning investments, you should be conscious of the biases and notions likely to impact your choices. In addition, we are often impacted by external influences, including risk propensity, family outlook, good fortune, and cultural ideas.
Risk aptitude is the degree of danger you are prepared to assume, often influenced by family history and cultural values. For example, young individuals from wealthy households are more inclined to invest in high-risk, high-reward opportunities.
On the other hand, individuals from modest socioeconomic backgrounds are more inclined to invest in conservative portfolios. Family views also affect our propensity to believe in the “luck” aspect.
Investing decisions are also influenced by our culture, which is a distinctive feature. Some communities, for instance, favor investing in gold, while others favor investing in real estate.
Diversify your portfolio according to an asset class
Determining which asset classes to invest in requires knowledge about your investing time horizon or the amount of time you want to retain your assets.
Younger investors with a longer time horizon may afford to invest in riskier assets, such as equities. In contrast, those with a shorter time horizon could choose a greater allocation to more stable assets, such as bonds.
Diversify within a certain asset class by buying different instruments
After diversifying across asset classes, the next step is to diversify further within each asset class. One approach to achieve this is to invest in various firms across various industries, which helps shield you if one industry suffers a loss.
For instance, if you only invested in technology businesses and tech expenditure suddenly decreases during a market downturn, the value of all the shares you purchased in those companies may fall. So instead, invest in firms from various industries, sectors, and geographic areas.
When deciding which firms to invest in, it is essential to do preliminary research to establish the stock’s stability and earning potential.
Know when you should get out of an investment
“Buy and hold” and “dollar-cost-averaging” are sensible investment methods. However, even if your investments run on autopilot, it does not imply you can disregard the market dynamics.
Maintain a level head and know what is happening in the market and the specific assets you have. In addition, you should be aware of the status of the businesses in which you invest. If you do this, you will know when to sell, trim your losses, and move on to another investing opportunity.
Consider investing in an index fund
You can diversify your portfolio by including index funds or fixed-income funds. Buying assets that mirror an assortment of indices is a great way to spread your portfolio’s risk over time.
When you diversify your portfolio with fixed-income options, you protect yourself against market fluctuations and uncertainties.
As opposed to investing just in one market segment, this kind of fund seeks to replicate the whole bond market’s performance by mimicking the performance of broad indexes.
Another advantage is that these funds often have cheap costs. It will put extra cash in your hand. The overhead for these funds is low due to their simplicity.
The passive management style of index funds could be disadvantageous. However, a passive investment could be subpar in inefficient markets when costs are higher than they should be.
For example, fixed-income markets may benefit from active management, particularly during economic uncertainty.
Follow a strategy based on buy and hold (HODL)
You could easily think of an investing strategy as a long-term savings plan. For this reason, you should shift your focus to the future rather than acting on impulse. Instead of engaging in frequent trading, consider a buy-and-hold approach.
This strategy entails maintaining a portfolio whose value remains constant over time, despite changes in the market. As a result, the investor takes a more hands-off attitude, letting their holdings develop rather than actively buying and selling.
However, it would help if you were not afraid to sell off investments that have risen in value too rapidly or consume a larger percentage of your portfolio than is necessary or advisable.
Rebalance your portfolio frequently
Your portfolio’s holding size will fluctuate over time due to how well each investment does.
Your portfolio’s weight will shift toward the holdings that have performed well while the underperforming ones are gradually reduced.
To keep your investments well-diversified, you should rebalance your portfolio from time to time so that each asset class has the proper weight. You should not have to do this more frequently than once every three months, but you should check in at least twice a year to be safe.
Be mindful of commissions
Even if you are not the trading kind, you should know what you receive for your money. For example, some businesses cost you a set amount each month, while others make their money from each transaction. All of these might pile up and eat away at your profits.
Always know exactly what you are paying for and receiving. Try to keep in mind that the cheapest option is not always the worst one. If your fees have changed, make sure you know about them.
Continuously invest over time
You should invest regularly and add to your portfolio as often as possible. Use dollar-cost averaging to invest 10,000 ZAR. When applied to market volatility, this method helps even out the fluctuations in the stock market.
This method proposes reinvesting the same sum of money at regular intervals to reduce investment risk. Dollar-cost averaging is a strategy wherein a certain amount of money is invested regularly in a predetermined set of assets.
Using this method, you would increase your share purchases during periods of low prices and reduce your purchases during periods of high prices.
Systematic Investment Plans (SIP)
You can still invest, even if you cannot do so with a large chunk of money all at once. To that end, you may want to consider establishing a systematic investing plan, or SIP.
In this way, you could gradually put money in mutual funds. In addition, South Africans should remember that slow and steady progress determines success.
This is a terrific method for first-time investors to get their feet wet since the investment money is deducted directly from their bank account.
Invest in Life Insurance
Many young South African investors might have never heard of buying life insurance. But, as a young person, particularly if you are single and without children, it might be difficult to contemplate your mortality.
However, the time-honored counsel to see life insurance as a vital investment vehicle remains sound, particularly while you are young and can take advantage of the cheap premium rates your insurance provider will likely provide you.
If you are young, you will pay less for life insurance since that is how the firms make their money. Even if you do not think you need it now, your loved ones will be better protected if you have life insurance.
Unit-linked insurance plans (ULIPs) combine life insurance with market-linked assets, allowing investors to receive a return on their life insurance premiums.
The insurance premium is paid out of the investment amount, while the remainder is invested in the market.
Consider ETFs
Because of the time commitment involved in researching individual equities, investors who lack the luxury of time may want to explore adding exchange-traded funds (ETFs) or other passively-managed funds to their portfolios.
ETFs are securities portfolios that aim to replicate the performance of a broader market index or a particular market segment.
When you invest in an ETF, you invest in the entire portfolio of assets the fund holds. Stash allows you to search for ETFs and narrow your search based on your desired degree of risk.
Including only one ETF in your portfolio may increase diversification, and ETFs often have lower costs than mutual funds.
Invest a portion of capital in Real Estate
Real estate should be considered by those who wish to diversify their portfolio even more. Investment in real estate has traditionally enhanced a portfolio’s total return while decreasing its volatility.
One option is investing in real estate investment trusts (REITs) that own commercial real estate that generates income. This industry has a proven history of success.
Multiple analyses have shown that an investment portfolio should allocate between 5% and 15% to real estate investment trusts.
A portfolio consisting of 55% equities, 35% bonds, and 10% REITs has, on average, beaten 60% stocks and 40% bonds while experiencing slightly greater volatility and producing returns on par with 80% stocks and 20% bonds.
Popular Examples of Diversified Portfolios for South Africans
Three of the most popular examples of a diversified portfolio are:
- Conservative Portfolios – 20% Stocks, 30% Short-Term Investments, 50% Bonds.
- Growth Portfolios – 5% Short-Term Investments, 25% Bonds, 70% Stocks.
- Balanced Portfolios – 10% Short-Term Investments, 40% Bonds, 50% Stocks.
Investors looking for steady gain over the long term often put more of their money in stocks, while those taking greater risks put more of their money in bonds.
Diversifying your portfolio is a profitable strategy to develop wealth and financial stability for the future, regardless of your investment portfolio choice.
Investment diversification is a skill that may help you maximize your wealth by reducing your exposure to risk while increasing your potential returns.
What is Over-Diversification, and How Can Investors avoid this?
The purpose of diversity is defeated if the addition of a new investment raises the portfolio’s total risk and decreases its projected return (without correspondingly lowering the risk).
This “over-diversification” often occurs when adding closely-correlated stocks to a portfolio or when the portfolio already has an optimal number of securities.
While it is important to spread your investments, you do not want to spread yourself too thin. Not all assets provide the same level of diversity.
Thus, South Africans must avoid having an over-diversified portfolio by avoiding holding investments that are redundant with one another.
Numerous small-cap or global stock market funds are two examples of fund categories where investors are unlikely to get much-added value by holding multiple funds.
It is like carrying four umbrellas on a vacation when you have no idea what the weather will be like when you need one.
Funds of funds, composed of many other funds, are another kind of fund you should pursue. However, these usually come with high costs and do nothing to increase your portfolio’s diversity.
Keep your investment portfolio to a minimum (ideally, only one or two funds per category) and consider the potential interactions between your various holdings. Uncorrelated assets, or assets that move in opposing directions, provide the greatest diversification advantage.
How to Choose the Right Stockbroker in South Africa
Today’s market is split between full-service and cheap brokers. While full-service brokers focus on the everyday financial needs of their clients, discount brokers cater to those who choose to take matters into their own hands.
Discount brokers typically offer an extensive selection of self-directed services over the Internet. Which broker is best for you depends heavily on your degree of skill and experience. However, different types of brokers provide investors with a variety of services crucial to the stock market.
This makes it challenging for South Africans to decide on a stockbroker through which they can trade local and international shares across stock exchanges. To help them out, we have provided traders and investors with some components they must evaluate when choosing a stockbroker.
Choose a broker that guarantees Client Fund Security and who can prove it
Account segregation, often known as ringfencing, is required in several countries. This aspect determines whether customers’ cash is safeguarded or lost entirely in the event of bankruptcy.
Ringfencing signifies that the brokerage business will maintain all customer money in a bank account with a selected bank, distinct from the account(s) containing operating funds.
Regulation and Authorization
Regulation signifies that the currency broker is registered with and regulated by the country’s financial market authorities to handle, process, clear, and settle trading money. Therefore, you do not have direct market access.
It would help if you used a broker for this. Several steps are involved in regulating brokerages, including requiring the firm’s management team to consist of qualified industry specialists. Even personnel must hold industry-level credentials to function in some businesses.
While a professional is aware that engaging in unethical activities might jeopardize their livelihood, they are extra cautious and sensitive when handling client finances.
Regulation guarantees that brokers adhere to a code of conduct that promotes openness and honesty while handling customer cash. In addition, there are severe consequences for any violations.
In other words, regulation constructs a structure of responsibility that safeguards the integrity of financial market systems.
The Financial Sector Conduct Authority (FSCA) in South Africa requires all currency brokers and leading stockbrokers to post their regulatory information (license number, etc.) on the homepage of their websites.
Broker Reputation and History
The selection of the most suitable stockbroker in South Africa is not limited to regulation alone. A broker could be well-regulated and follow all the rules. Yet, there might still be difficulties that influence the whole experience.
There is more to trading than placing orders to buy and sell stocks and other financial instruments. A timely and courteous customer service would be nice if you had questions that required answers.
You may also want enhancements to your experience, including payment options that facilitate instant deposits and withdrawals.
Some traders might need a cold wallet that enables them to transfer gains out of their trading account, so they may set aside a portion of their earnings and continue trading with the remainder.
Every trader desires certain outcomes from their interactions with a stockbroker. The only method to determine if a broker fits your trading and investment needs is to examine its overall reputation in the industry.
Thankfully, internet forums and blogs are plentiful; on these sites, you can easily get information from other traders on the quality of South African brokers. These independent sources of information could tell you a great deal about the currency broker’s past performance.
Commissions
With the advancement of technology, the cost of trading stocks has fallen significantly. A reputable online broker will provide cheap commissions on stocks, options, mutual funds, and exchange-traded funds (ETFs).
Although fees vary, the industry average for internet brokers is less than 200 ZAR for each deal.
Account Minimums and Fees
There are several reputable brokers with no account minimum. However, many brokers could ask for a minimum initial deposit between 5,000 to 10,000 ZAR or more. So, you might not eliminate account fees, but you could surely reduce them.
Many brokers will charge a fee for withdrawing investments or cash and canceling an account. However, if you are shifting to a new broker, the new firm may repay your transfer costs, at least to a certain extent.
Most additional costs may be avoided by selecting a broker who does not charge them or declining extra-cost services. Outlays include yearly fees, inactivity charges, trading platform subscriptions, and supplementary expenditures for research or data.
Margin Trading
In contrast to futures and currencies, the ability to trade stocks on margin is not always a given. Margin trading requires account approval and is subject to statutory restrictions.
Overall Customer Support
Any online broker considered a prospective choice for your company must have a specialized staff to handle any emerging trade-related concerns.
Access to a trading desk and technical assistance during market hours are especially important for the seamless execution of trading activities.
Platform Options
Multiple platform choices are useful for traders who want to access the market in more than one way. For example, online stockbrokers often provide customers with web, desktop, and mobile apps.
Research and Education
A well-rounded instructional package may be an invaluable resource for trading growth. Many traders will learn via webinars, live lessons, and professional blog articles.
The Best Share CFD brokers in South Africa
In this article, we have listed the best brokers which offer share trading to traders. In addition, we have further identified the brokers that offer additional services and solutions to traders.
Best MetaTrader 4 / MT4 Share CFD broker in South Africa
Overall, CM Trading is the best MT4 Share CFD broker in South Africa. CM Trading is one of the largest MT4 brokers in South Africa that accepts a range of hedging, scalping, and EAs. In addition, CM Trading provides traders with simple account types that can be used with MT4.
Best MetaTrader 5 / MT5 Share CFD broker in South Africa
Overall, AvaTrade is the best MetaTrader 5 Share CFD broker in South Africa. AvaTrade offers South African traders access to MT5 via its retail and professional trading accounts. With AvaTrade, South Africans need not worry about commissions while they trade global share CFDs.
Best Share CFD broker in South Africa for beginners
Overall, HFM is the best Share CFD broker in South Africa for beginners. HFM offers South African traders diverse investment options across shares, bonds, ETFs, and more. In addition, HFM provides an extensive list of educational materials ranging from articles, market analysis, videos, and more.
Best Low Minimum Deposit Share CFD broker in South Africa
Overall, XM is the best Low Minimum Deposit Share CFD broker in South Africa. South Africans can easily start trading with XM with a low minimum deposit of 5 USD / 90 ZAR. XM offers over 1,000 CFDs, including those on indices and shares spread across global markets.
Best ECN Share CFD broker in South Africa
Overall, VantageFX is the best ECN Share CFD broker in South Africa. VantageFX is one of the best options for professional investors who want the best pricing across markets.
VantageFX provides several asset classes and is ideal for traders who want to participate in short and long-term investing.
Best Islamic / Swap-Free Share CFD broker in South Africa
Overall, FXTM is the best Islamic / Swap-Free Share CFD broker in South Africa. South African traders have a choice between several options for an Islamic Account.
While FXTM keeps the spreads the same as on standard accounts, South Africans can expect a holding fee after 2 to 7 days.
Best Share CFD Trading App in South Africa
Overall, Skilling is the best Share CFD trading app in South Africa. The Skilling app is available on iOS and Android. It provides South Africans access to deposits, withdrawals, instrument searches, and customized watchlists.
Best ZAR Share CFD broker in South Africa
Overall, Exness is the best ZAR Share CFD broker in South Africa. Exness is one of the best high-leveraged forex and CFD brokers for South African investors.
South Africans can register a trading account with a minimum deposit of 190 ZAR / 10 USD, providing them access to 278 instruments.
Best Lowest Spread Share CFD broker in South Africa
Overall, FBS is the best lowest-spread Share CFD broker in South Africa. In addition to providing a comprehensive and powerful trading app, FBS also charges negative spreads on major instruments if the market conditions allow it.
Best Nasdaq 100 Share CFD broker in South Africa
Overall, Plus500 is the best Nasdaq 100 Share CFD broker in South Africa. In addition, plus500 is one of the most popular options in terms of long-term investment.
South Africans can use Plus500’s proprietary trading app to access popular instruments such as Nasdaq 100 as an Index CFD or shares from this exchange as CFDs.
Best Volatility 75 / VIX 75 Share CFD broker in South Africa
Overall, FXPesa is the best Volatility 75 / VIX 75 Share CFD broker in South Africa. FXPesa is an FCA and CMA-regulated broker that provides VIX as a CFD instrument on indices.
South Africans can expect competitive trading conditions and commission-free options when they trade with this broker.
Best NDD Share CFD broker in South Africa
Overall, IC Markets is the best NDD Share CFD broker in South Africa. In addition, IC Markets is widely known as one of the best true ECN brokers in South Africa, offering traders access to powerful trading platforms and affordable trading conditions on share CFDs.
Best STP Share CFD broker in South Africa
Overall, FOREX.com is the best STP Share CFD broker in South Africa. With an execution scorecard and proven record of accomplishment, FOREX.com is the best choice for South Africans who want reliable trade execution, a range of markets, and powerful trading technology.
Best Sign-up Bonus Share CFD broker in South Africa
Overall, JustMarkets is the best sign-up bonus Share CFD broker in South Africa. In addition, JustMarkets offers South Africans access to a generous no-deposit bonus once they have completed account verification on a live account.
Traders can use this to explore the range of markets JustMarkets, the trading conditions, and the powerful trading platforms offered for share CFD trading.
Conclusion
When you invest, you offer your money a chance to grow, which may be used to fund other endeavors. Therefore, South Africans should start investing as early as possible to maximize their returns.
Investing in a variety of different things will help spread out your rewards and improve them. It is also possible to choose from several different portfolio models, ranging from an all-stock portfolio to one that includes assets from a wide range of risk and return potential.
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Frequently asked questions
Should my investment portfolio be diversified?
It would help if you diversified your investment portfolio. Diversifying your portfolio is the best strategy to maximize your profits while minimizing your loss exposure.
What serves as an example of a diversified portfolio?
In terms of the stock market, for instance, diversification is allocating a percentage of your investment capital to higher-risk stock trading, which you then disperse among several different stocks and firms.
When you diversify, some of your money goes into more secure investments like bonds or mutual funds.
What is the ideal portfolio mix for South Africans?
Sixty percent in equities and forty percent in bonds has long been considered a good baseline allocation. However, given the dismal return on bonds recently, some experts are advocating a new norm of 75% equities and 25% bonds.
What is the risk of over-diversification?
An overly diversified portfolio risks lowering expected returns without providing any real protection against loss.
This is because the total risk of a portfolio decreases as more investments are added to it. However, the projected return of the portfolio would fall because of these little increases.
What is a well-balanced portfolio in South Africa?
To strike a happy medium between the two, investors who use a “balanced” approach construct portfolios that include many asset types.
Addendum/Disclosure
No matter how diligently we strive to maintain accuracy, the financial markets are volatile that could shift and change at any given time, even if the information supplied is correct at the time of going live.
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