Asset allocation and diversification are fundamental concepts in investing. Understanding how to distribute your money across different investment types can reduce risk and improve returns—especially in unpredictable markets like South Africa’s.
1. What Is Asset Allocation?
Asset allocation refers to how you divide your investment portfolio among different asset classes: equities (stocks), fixed income (bonds), property, cash, and alternatives (like gold or crypto). Your allocation depends on your goals, time horizon, and risk tolerance.
2. Why It Matters
No asset class performs well all the time. By spreading your investments, you reduce the risk of a single loss wiping out your portfolio. For example, if local stocks decline, global bonds or property might balance the loss.
3. Types of Investors and Typical Allocations
- Conservative: 70% bonds, 20% cash, 10% equities
- Moderate: 40% equities, 40% bonds, 20% cash/property
- Aggressive: 70% equities, 20% alternatives, 10% bonds
As your risk tolerance or life stage changes, so should your allocation.
4. What Is Diversification?
Diversification involves investing in different sectors, geographies, and asset types within each asset class. For example, owning shares in banks, retailers, and tech companies is more diversified than investing only in one sector.
5. Tools for Diversification
- ETFs and Unit Trusts: Provide instant diversification within a single product.
- Offshore Investments: Offer exposure to international markets and currencies.
- Real Estate and Alternatives: Add another layer of protection and growth.
6. Review and Rebalance Regularly
As asset values change, your original allocation shifts. Rebalancing—adjusting your holdings back to your target percentages—keeps your portfolio aligned with your goals.
7. Don’t Chase Trends
Avoid making emotional decisions based on short-term market movements. Stick to your strategy and adjust only when your personal situation changes.
Mastering asset allocation and diversification helps manage risk while aiming for growth. It’s not about avoiding risk altogether, but making it work in your favour.