The Role of Diversification in a Healthy Portfolio

Jessica Amodio
Partner & Independent Financial Adviser at GDA

Portfolio diversification is an investment strategy that involves spreading your investment capital across a variety of assets or securities within your investment portfolio. The aim of diversification is to reduce risk and increase the likelihood of achieving more stable and consistent returns over time. Diversification is most important when there are periods of uncertainty and market volatility.

While it is tempting to think that keeping your captial in cash is a good strategy during these times, with deposit rates remaining relatively high, historically it has not proved to be the best option for investors and it is still expected that cash will underperform other asset classes in the next 12 to 18 months. Investors should therefore look to diversify their portfolios broadly, across global equities, fixed income, and inflation-protecting assets. The best solutions can often be found in private markets, including real assets such as infrastructure and timber, which were top performers in 2022 according to the global market strategists at JP Morgan.

Building an appropriately diversified portfolio is only the first step. Over time, market movements will cause your asset allocation to drift. So for example, if stocks have a strong run, the equity portion of your portfolio may grow larger than forecasted. To maintain your preferred asset allocation, it's important to rebalance periodically by shifting some of your portfolio's earnings into other parts of your portfolio that may not have fared as well, keeping you aligned to your long-term plan.

We recommend reviewing your portfolio annually. For example, you might intend to allocate 60% of your portfolio to stocks, but if stocks are performing well, you could end up drifting closer to a 75% allocation. Shifting assets to maintain your intended allocation ensures your portfolio continues to mirror your risk tolerance and goals.

Diversification is a fundamental strategy for managing investment risk and building long-term wealth. While it may not guarantee profits or protect against all losses, a well-diversified portfolio can help smooth out market volatility and provide more consistent returns over time.

This article is for general information and does not constitute personal financial advice. If you’re unsure what’s best for you, seek independent financial advice.