Why is it important to have a diverse portfolio?

Q: Why is it important to have a diverse investment portfolio?

A: Diversity isn't only a liberal battle cry – or an ageing dance troupe – it's an investment strategy that can help to protect your money. It's why one of the main trends of the current investment landscape has been the growth in demand for multi-asset funds. This has been driven by a financial crash and recession that saw what were previously thought of as relatively solid investments, such as Irish bank stocks and property, tank, taking many hard-earned nest eggs with them.

This time around, caution is the watchword and having a diversified investment portfolio is one way of reducing risk.

Multi-asset funds, which invest across a range of asset classes and geographic locations, take the onerous task of managing a diverse portfolio off the average time-poor and knowledge-poor investor.

Before choosing which fund is right for you, investment specialists can help establish a person’s appetite for risk, gauging the importance to them of capital guarantees versus growth potential, to see whether they are a “defensive” or a “dynamic” investor.

Fund suites such as KBC’s Privilege Portfolio, or Standard Life’s MyFolio allow each type of investor to choose a fund that best suits their needs. Some funds are weighted more heavily in favour of conservative instruments such as bonds, for example, while others participate more fully in more volatile equities.

Appetite for risk

Despite the financial crisis, it remains the case that, over time, the greater the appetite for risk, the greater the potential for rewards.

The MyFolio suite of funds is numbered 1 to 5, with 1 aimed at those who are most risk averse, and 5 for the more risk tolerant. Its mid-point, MyFolio3, has seen an average return of 7.6 per cent per year over the past five years, compared with 4.7 per cent for MyFolio1 and 10.1 per cent for MyFolio5.

In the current low interest rate environment, each beats money on deposit by a significant margin.

“Multi-asset funds hold a mix of equities, bonds and alternative investments,” says Brian O’Reilly, head of the global strategy team at Davy. “In Ireland in the past there was too much focus on stocks and, within that, too much focus on Irish stocks. Of course there are some very good Irish companies but it’s a very shallow market.”

Before the financial crisis, Irish investment managers had too much of a “home” bias, he says. “Now people are looking overseas and into difference currencies and different kinds of fund managers.” Investing in a multi-asset fund is one way of achieving the kind of diversity investors are looking for in one go.