We’ve all heard about the importance of diversifying… and most of us think we are diversified. But what if you’re doing it wrong?

At WellsFaber, we believe that an important part of your financial journey is to minimise risks to your finances and future as much as possible. This is why we champion diversification. But many people misunderstand the idea of diversifying and the various reasons for it.

Many people understand that investing all your money into one mutual fund, for example, is risky. It’s like putting all of your eggs into one basket, and with Easter eggs still sitting in the cupboard, it makes a lot of sense. What if something happens with that fund? But whilst investing in, say, four different mutual funds, you’re reducing your risk but you’re not diversified.

Likewise, investing in various companies on the Satrix top 40 is not diversification, nor is putting all your money into property, nor is having 90 percent of your money in a retirement fund and 10 percent under your mattress. Diversification is not only about ensuring that not all your money goes down the drain in a crisis with a single investment vehicle.

The expression ‘don’t put your eggs in one basket’ may be to blame for this. While it’s a great analogy with regards to diversification, the average investor hasn’t spent enough time on farms with chickens to really understand it. To think of one investment vehicle, like stocks in one company, as a ‘basket’ is not wholly accurate. When it comes to diversification in investing, an asset class is considered a basket.

It helps to think of investing options more as a seesaw than a collection of baskets. If equities are up, bonds are likely down. Or something else is up and in comparison a different asset class is performing less well. That’s the way that the markets work, and a truly diversified portfolio needs to be designed so that at least a portion of your money is doing well in all seasons.

If the stocks you’re invested in aren’t doing great in a bear economy, perhaps your property portfolio will be appreciating. If your local investments are suffering because the rand is weak, then your offshore investments will be performing better.

Of course, it’s impossible to predict what will do well when, and this is why we encourage diversification as a powerful investing strategy.

Of course, there are other questions here, like how overweight to be in one asset class or underweight in another, what asset classes to be invested in and why… and herein lies the benefit of having a trusted, independent financial advisor.
We are able to give expert advice, tailor made for your budget, preferences and goals as well as for current economic conditions. One more way that we equip you to thrive!