Many people looking to secure their future keenly watch the stock market. 2022 saw the energy sector thrive, with the likes of Exxon, Hess, and APA enjoying up to 87% returns. However, those wanting to catch this wave in 2023 might seek to look elsewhere. This is given that lightning rarely strikes the same place twice.
Here we’ll look at the concept of portfolio diversification as a potential alternative to going after the big names and how such an approach can offer better long-term results for any would-be investor.
What is Portfolio Diversification?
Portfolio diversification means spreading your investments across multiple assets rather than putting all your eggs in one basket. A non-diversified portfolio may contain investments in a single stock. A diversified one may include multiple stocks, as well as bonds, infrastructure, investment trusts, private equity, savings accounts, and even property.
The Apple Example
Everyone knows Apple. They’re one of the world’s biggest companies, valued at around £2 trillion. They’ve created some of the most ground breaking products over the last 30 years, and evidence suggests they’ll continue doing so. Success is very much in their DNA, and the company has a higher value than the main UK stock market and is worth twice as much as Germany’s.
Many an investor has benefited from holding an Apple share or ten. Many more have decided to look no further and focused on the brand as a guaranteed win. That’s understandable, but in such an example, diversification can be seen as a greater option.
What does this mean in practice? In 2022, Apple made around £76 billion in net profits – a healthy sum indeed. But by comparison, a hundred stocks of the FTSE 100 – including Shell, BP, and Unilever – made £215 billion in profit.
A diversified stock portfolio would likely have brought about better returns for the average investor. Furthermore, it comes with less risk.
It’s worth recalling that no single company is ever too big to be surpassed. Given the enormous levels of innovation shown by Apple, the company will likely continue to thrive for some time. But the law of averages dictates that no company can always remain at the top of the tree.
Benefits of Portfolio Diversification
As we’ve seen from the above example, a diversified index of stocks has the most potential for giving good returns. Invest in several different stocks, and you’ll likely do well in some areas and not so well in others. But you’ll never be in a position where everything can be lost.
Across all markets, trends change. What’s hot today can quickly become yesterday’s news. And let’s not forget the impact of the global pandemic and what natural disasters can do to economies and stock prices. Diversification is a safer bet, guarding against the unpredictable and allowing you to sleep better at night.
Things to Consider
It’s worth putting in a little time when considering a diverse portfolio. If you currently have investments in any arena, list these. Then take a look at what other opportunities are out there. Look at the following as a starting point, and consider discussing the likes of these with an independent financial advisor:
- Different stocks
- Savings accounts
- Private Equity
- Investment Trusts
All investments carry an element of risk. Property, for example, may feel a safer bet than stocks, but the housing market is also subject to fluctuations. Investing purely in this domain could be badly affected by recessions, just as investing in a single stock could be affected by market forces.
It pays to consider all the options available rather than just going for wherever the biggest prizes appear to lie currently. For further information, keep an eye on our monthly market commentaries.
A Long-Term View
It’s natural that all investments experience upturns and downturns over time. Nothing is set in stone, and the most successful investors continually reassess their choices over time to minimise any risk and maximise reward. No matter whether you’re just starting out or already have a consummate portfolio of investments, speak with our Senior Wealth Manager, Michael, for an unbiased and expert view today