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As a proverbial saying goes, “variety is the spice of life” and the same could be said of investing. Variety could be one of the key factors that help investors manage risk and achieve long-term investment outcomes.
Like gardeners planting for floral blooms throughout the year, portfolio managers generally take long-term views on their investments.
Having multiple assets in a portfolio
Instead of just planting a single type of flowers, a gardener generally grows a range of floral or even vegetal species that can thrive under different environments – just in case an unexpected change in weather conditions or the appearance of pests could damage a whole floral species.
Similarly, investors could rarely achieve their investment goals by focusing on just one asset as no single asset class could stand out as an all-time performer through the years. Portfolio managers generally hold a diverse mix of assets to help manage risk and navigate fluctuations under different market conditions1.
Generally, a diversified strategy could include traditional assets such as equities and bonds, or even non-traditional assets like securitised debt. The key is to include assets which have low and even negative correlations.
Asset class returns from 2010 through 20202
As the chart illustrates, despite all of the difficulties faced by markets over the past 10 years, a diversified portfolio of stocks and bonds delivered an annualised return of 6.4% during the 10-year period with lower volatility than a pure equity portfolio.
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Diversification is shown to have worked
Markets could have a bad day, week, month or even year. As the chart illustrates, a blend of stocks and bonds has not produced a negative return over any five-year rolling period in the past 70 years whereas the range of five-year stock returns has varied widely since 1950 (+28% to -3%)3.
Volatility will likely persist as market conditions evolve. Alongside time, diversification could help investors navigate bumpy rides and stay invested for the long term.
The benefits of diversification and long-term investing3
As a garden could sometimes have one type of flower but in different colours, investors could also optimise diversification across the full spectrum of an asset class such as fixed income.
Depending on their investment objectives and risk appetite, investors could consider opportunities in traditional fixed income sectors such as core government bonds and investment-grade credit, or even the extended sectors such as securitised assets, as they build a diversified portfolio.
Cash and some government bonds are delivering negative real yields4
This could be similarly so for stocks where a more established economic recovery in emerging markets, alongside a weakening US dollar could bode well for select emerging market equities1. Read more: Emerging markets springing into action in multi-income
And on the back of on the back of current supportive macroeconomic policies, dividend stocks1 are becoming relatively attractive multi-income opportunities. Read more: Dividend stocks are back on multi-income investors’ radar
Global equity performance by region5
As no single asset class could stand out as an all-time performer through the years, seeking exposures to multiple asset classes with low correlations could help seek some blossoming blooms in different market conditions1. Go across the asset classes and optimise the benefits of diversification.