Diversifying your Portfolio - Anglo Offshore International Group...

Most investors know not to put all their eggs in one basket. Yet over the years we have met with many prospective clients, in many different countries, who believe because they have invested into different investments that their future is well protected.

Unfortunately, your portfolio is not diversified unless your investment choices provide you with an opportunity to benefit from positive performance in different investment vehicles while aiming to minimise concentration in any one area that might decrease your overall return. Of course, your strategy should focus on the type of investment that best matches your primary objective -- but you should be sure to round out your portfolio with investments expected to do well under different market conditions.

For example, many Venezuelans we have met over the years, held property, and re-invested income into their own business or directly invested into another, believing that they were well placed regarding their long term needs. Sadly, many have found to their cost that this was a strategy WITHOUT diversification.

The importance of a well diversified investment mix is to ensure that all your assets cannot be devastated or constrained by a poor performance, or adverse conditions, in one or more areas of local or international sectors.

Before we analyse how we can diversify an investment Portfolio, let us first decide what should be there and what shouldn’t.

An existing business cannot be assumed as part of an individual’s future retirement fund… Unless, its shares are freely tradable and listed on a major international exchange… Even in these circumstances we would be very cautious about anticipated future values and returns.

A successful company provides its owners’ with a sufficient level of income to ensure a surplus is available for its owner to create both a short and longterm financially secure structure, totally independent of the company’s future , or creates an in-house saving or retirement scheme in the owner’s name, totally independent and separate for accounting purposes and never available, for any liability the company may incur.

For those whom believe that they shall pass the business on to their children, when they retire and a comfortable income shall be provided throughout their life need professional medical help. Rarely does a business burdened with an extra fixed expense, often survive without some negative experiences being encountered. We have too often seen, a parent having to make a choice between, breaking a company or like an errant child with little control over their pocket money, cap in hand, seek part of the agreed amount, without bankrupting the company and their children’s future. We know this type of scenario can easily be avoided, if an independent fund has been created to cover the income needs of three or four years, until, a company can recover its position or more likely develop the business whereby a sustained income level can be provided, without serious impact on corporate cashflow.

Another scenario quite unacceptable is the perception that a buyer will be found around retirement age, to buy the company for an amount adequate to provide the capital sum necessary to fund an annual retirement income. Simply put, rarely if ever does a company sell for an amount anywhere near what its owner believes is its value. This is especially true of those companies which, in its past, doctored accounts to save paying taxes. Most buyers will gear their offers to the verified accounts, not to what the seller tells them is real.

NONE OF THE ABOVE SCENARIOS SHOULD GIVE ANY REALISTIC COMFORT, TO AN INDIVIDUAL SEEKING A SECURE FUTURE.

Property investments can be used, however once again, a note of caution. Rarely do sellers obtain the price they seek and if you retire, or are retired, when economical or political circumstances combine to effect rental income opportunities and therefore capital values, then unless you have access to other funds or income sources, whereby you can wait out, until better times, when rental income return to normal values, then a property portfolio, which has taken a lifetime to assemble can become a “House of cards”. Again, the pragmatic action of the planned re-direction of some rental income over the years, to insure that a disaster fund is in place, to cushion possible negative future events, is good diversification.

Those intelligent enough to make independent provisions, the following points become important….

Diversification Across Sectors and Types.

Diversification among Funds and asset classes refers to creating a portfolio that contains a mix of at least the three major asset classes: stocks, bonds, and money market instruments. Generally, when the stock market is up, the bond market is down and vice versa. Cash investments typically provide a conservative and often steady return. Stocks and bonds yields tend to move in the opposite direction. Cash and fixed interest instruments are considered a more stable investment. By diversifying among asset classes you can strike a balance which will help cushion your portfolio against the investment swings in any one asset category.

Diversification Within Asset Classes
You can diversify further by selecting different types of securities within each asset class. For example, when investing in Equities, don't limit yourself to a single Equity fund, Equity/ Stock, Equity Sector, country or region Instead, consider investing in funds that represent a variety of types and styles. Combine different types of securities, such as large-cap stocks and small-cap stocks, with different investment styles such as growth or value stocks. Like the basic asset classes, various types of securities or investment styles react differently to changing market conditions. Cycles usually favour one segment over another, sometimes over long periods. Diversification among various segments allows you to reduce the risk of guessing which segment is currently in vogue.

Diversification Over Time
Finally, invest over time. Diversification over time offers another way to reduce risk while helping avoid the emotional aspects of market timing. Some investors try to time the stock market by jumping in and out when they feel the price is right. Unfortunately, market timing only works when you accurately predict the direction of the stock market. Even financial experts have been unable to do this reliably. Instead of buying low and selling high, investors who attempt to market time often do the reverse. They buy after an extended period of rising prices in an attempt to share in the profits, and sell in a panic when prices fall. Rather than trying to time the market, an investment of a set amount of money on a regular basis can help reduce this pattern. This strategy is referred to as dollar-cost averaging (See next page) and enables time rather than impeccable timing, to ensure success.

There is no guarantee the market will follow any past example. There can be no guarantee that past experience is in any way indicative of future results, however DCA enables a pragmatic investor to steer a course and so position themselves, as favourably as possible over the long term.