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Consistency in uncertain times: Why portfolio diversification is back in vogue

September 15, 2021

Consistency in uncertain times: Why portfolio diversification is back in vogue

Experts and analysts are urging investors to return to the tried and true strategy of keeping a diversified portfolio as inflation fears loom and market outlooks grow increasingly uncertain.

Experts and analysts are urging investors to return to the tried and true strategy of keeping a diversified portfolio as inflation fears loom and market outlooks grow increasingly uncertain.

Although diversification has long been considered a hallmark of sensible investing, helping protect investors from the ebbs and flows of markets to grow their wealth, this strategy has fallen out of fashion in the past decade.

Instead, a growing cohort of investors are targeting rapid, explosive growth by placing fewer, higher-stakes bets on a handful of investments.

It’s an ethos perhaps best captured by billionaire investor Mark Cuban – who in 2011 told Wall Street Journal that diversification is for “idiots” – and reflected in 2018’s Bitcoin crash, and the subsequent growth that’s seen token prices climb roughly ten times.

But this kind of rapid growth is incredibly rare and leave investors vulnerable if markets take a dive.

Now, with talk of inflation derailing US growth, leading portfolio managers are encouraging a return to diversified portfolios as a way to protect wealth and achieve steady ongoing growth over the long term.

Join us tomorrow for a live investor briefing where we will delve into the investment opportunities within the MAD 5 index. Learn about how you can potentially benefit from a rules-based index with a diversified global exposure. Click here to register.

Inflation, uncertainty to shape investors’ decisions

Inflation has become a hot-button issue in markets as the US Federal Reserve shrugs away mounting fears that recent increases in the prices of consumer goods are here to stay.

Between May and June this year, US consumers have seen used car prices climb 10.9%, while the fuel these vehicles rely on has swelled 2.5%.

Further eating into household budgets are meat, poultry, fish and eggs (up 2.9%), dishware (up 1.9%) and womens’ apparel (up 1.6%).

Then in June, the Consumer Price Index (CPI) came out at 5.4%, well ahead of the 5% forecast and the largest monthly increase since August 2008.

The whole way through this, the Federal Reserve has maintained these price gains are transitory and the inflationary pressures pushing up prices will fade.

Not everyone agrees with this assessment, however. As prices continue to rise a growing chorus of analysts and experts are warning the drivers behind this inflation are here to stay and prices will continue climbing for some time.

Billionaire investor and founder of Thorney Capital Group Alex Waislitz noted this debate is one of several factors which have left investors split on how markets will perform in the years ahead.

“There are many who think that, particularly with the low interest rate environment and the amount of cash on the sidelines, there’s no reason markets shouldn’t continue to trend up,” he told Reach Markets in August.

“But there are others who are nervous about multiples that are being priced on a lot of stocks, and at the same time the looming threat of inflation.

“I don’t think I’ve been in a situation before where speaking to a bunch of smart people will give you different views on the markets.”

Keep it consistent

As uncertainty about the market’s future mounts, investors looking for consistent returns will need to diversify their portfolios across assets and countries.

Diversifying across both asset classes and geographic regions helps investors protect themselves from shocks both within certain markets (eg. holding bonds could keep investors safe from downturns in equity markets) and within certain regions (political upheaval, currency movements, interest rates and even weather events).

This latter point is especially important in Australia, where investors typically hold a ‘home bias’ – a preference to invest within Australia.

Even outside major events affecting a country’s economy, the performance of different countries tends to diverge over time with some faring better than others in one year before being eclipsed the next.

Investing across numerous countries, then, tends to produce more consistent returns than placing everything into one country and hoping for the best, just as holding different asset classes does.

If you would like to know more about this opportunity, register for our live investor briefing tomorrow at 1pm. Book your spot here.


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