Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of FX Strategy
Diversification is a key tenet of investing, and it means spreading your risks across various assets, sectors, and geographies. While the concept is well-known, many investors struggle with practically applying this strategy.
To determine how diversified you are, consider these steps:
Determine what percentage of your total portfolio is allocated to each asset class, sector, and geographical region.
Now that you’ve categorized your investments and gained insight into your asset allocation, sector exposure, and geographical focus, it’s time to address any diversification gaps. Below, we outline actionable strategies to effectively enhance your portfolio’s diversification.
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The Core-Satellite Approach is an investment strategy that combines passive, low-cost investments as the core with more targeted, higher-risk, actively managed investments as satellites. The goal is to achieve long-term, stable growth with the core while using satellites to pursue higher returns through active management and more focused strategies.
This is the stable foundation of your portfolio, typically consisting of low-cost index funds or ETFs that track broad market indices across multiple sectors, asset classes and regions. The goal is to provide steady, long-term growth with lower volatility. Examples include S&P 500 ETFs, Total International Stock Index ETFs, Global Bond ETFs.
These are smaller, actively managed positions that focus on specific sectors, themes, or high-growth opportunities. Satellites are meant to enhance overall returns and take advantage of market trends without increasing the portfolio’s risk too much. These could include:
This balanced approach ensures that the majority of your portfolio remains stable and aligned with long-term market growth, while the satellite investments offer the potential for outperformance without significantly increasing risk.
Typically, the core investments should make up around 60-80% of your portfolio, while satellite investments should make up the remaining 20-40%. This breakdown will, however, depend on your risk tolerance.
To achieve well-rounded diversification, you may want to consider spreading your investments across multiple asset classes:
Ensure you have a mix of large-cap, mid-cap, and small-cap stocks, and consider adding international stocks from both developed and emerging markets.
Bonds can provide stability. You may want to explore options such as government bonds, corporate bonds, and bonds with different durations and credit qualities. Some references are below:
Real estate investment can offer a hedge against inflation and diversification beyond traditional assets. You might consider REITs or direct real estate investments.
Gold, silver, or oil may provide diversification, and you could explore these through commodity ETFs. Some examples are below:
Depending on your risk tolerance, private equity, hedge funds, or cryptocurrencies could be considered as part of your alternative asset strategy.
To mitigate sector-specific risks and capture growth across various industries, consider diversifying your investments across different sectors. This can help you reduce the impact of industry-specific downturns and potentially capture growth in various segments of the economy.
To spread risk and potentially enhance returns by investing across different global regions, consider diversifying your portfolio geographically:
By incorporating investments from different geographic regions, you can reduce your portfolio’s exposure to any single country's economic conditions and benefit from diverse growth opportunities worldwide.
Rather than investing a large sum at once, dollar-cost averaging involves investing a fixed amount of money at regular intervals. This approach can help smooth out the impact of market volatility and allow you to build a diversified portfolio over time. Setting up automatic contributions to your investment accounts may be considered to ensure consistent and disciplined investing.
Over time, some of your investments will grow faster than others, potentially leading to an unbalanced portfolio compared to your target allocation. Consider rebalancing periodically to ensure your portfolio stays aligned with your original asset allocation.
Major life events like marriage, buying a home, or retirement can significantly impact your financial goals and risk tolerance. Review your portfolio after these events to ensure your diversification strategy still aligns with your new circumstances.
By considering these strategies and regularly reviewing your investments, you can maintain a diversified portfolio that balances risk and opportunity, aligned with your financial goals.
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