In the mix: Diversifying is designed to work over time

To the uninitiated, investment can seem like a complex science or an esoteric art. In fact, the guiding principles are simple enough to have come from one of Aesop’s fables: don’t put all your eggs in one basket.

“It’s about the most hackneyed investment cliche there is. Everybody says it but it’s because it’s so important,” says Bernard Walsh, head of pensions and investments at Bank of Ireland Investment Markets.

By spreading your investments, your exposure to any one class of asset is limited. The aim is to smooth volatility and balance risk and reward over time.

That’s the theory. In practice, the need for it is forever seared into the brain of those, often first-time investors, who held Eircom shares or bank stock before the financial crisis. There is now a new generation of investors coming through who won’t have experienced such painful lessons, so it’s worth a reminder that by widening the spread of your investment the likelihood of any one big downturn upending everything is reduced. The crash of 2008 is actually a case in point.

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“When share prices fell, those who had moved into the bond market were insulated,” says Walsh. “People who had got nervous about shares had moved into bonds, which are seen as a safe sanctuary, similar to the way gold is.”

Traditionally, if shares were not doing well, bonds did a little better, one providing a hedge for the other. For individual investors the aim is therefore to have a mixed investment portfolio, ideally with some assets focused on growth and others on income. For added insulation, factor in geography too.

“Traditionally a lot of fund managers had a lot of exposure to Irish shares because it was the one we knew best – but it is also relatively small,” says Walsh.

The growth of multi-asset exchange traded funds has helped, giving investors exposure to tens of thousands of companies in one product.

The best performing stocks this year have been those connected to artificial intelligence. Many funds will have seen many investors here benefit from the strength of the “magnificent seven” big US tech stocks, Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla.

In fact, the performance of various asset classes over the past year provided a clear lesson of the importance of diversifying. In 2022 commodities were top of the pops in terms of investment returns. “We saw oil, gold and food rise, much of it based on the war in the east and rising inflation,” says Walsh.

This year, commodities have fared worst in the league table of asset classes, with developed market equities topping the poll. “It shows they all have their day in the sun,” he adds.

Diversity also means looking at alternative investment classes which, in Ireland, often means property.

“We have this John B Keane ‘Field’ mentality,” says Walsh. “But Irish people already tend to have quite a high exposure to property anyway, either through their family home or a holiday home or investment property. So when we look at property investment funds, even though they are mostly commercial, which helps, it is still property.”

Including infrastructure such as a motorway, toll road or car park, which provide a flow of income over time, can be a sensible option.

“Investing in a toll road is reasonably recession proof and usually goes up in line with inflation too,” says Walsh.

While private individuals can’t invest in motorways, “unless you’re super rich”, they can do it through a fund that has an allocation of 2 or 3 per cent to roads, he adds.

Equally, Bank of Ireland partners with KBIGI, a fund that invests in equities of international companies in the energy sector. “It means that under the bonnet you have wind power, biofuels and solar energy,” says Walsh.

Diversity theory doesn’t always work. “Last year was the first time in years that both world stock markets and bond markets fell – and by figures in the mid-teens,” says Walsh. “Many alternative investments failed to deliver as well.”

But the strategy is designed to work over the long term. Over the past 10 years annual returns from equities performed best, followed by real-estate investment trusts, with portfolio products coming third, according to research by JP Morgan Asset Management.

Over time, portfolio products scored well, typically coming second or third, with some exceptions.

“It shows you that if you have a mix, it gets you up towards the top consistently,” says Walsh.