One of the most common mistakes made by investors is to have too much money invested in a single asset or asset type. The risk is that if one asset fails to perform, a substantial part of your portfolio will be affected. In ordinary terms, diversification means spreading your investments across different asset classes and investment managers. That way, if an investment does perform poorly, you still have other investments to offset the loss.
As shown in the example below, investing in just one stock carries greater risk as you’re more sensitive to market volatility. If the value of the stock decreases the impact on your portfolio is felt immediately. On the other hand, by diversifying into a variety of investments and across investment managers you’ll reduce the impact of any significant movements to individual investments.
Impact of 50% drop in the value of 1 stock
The diagram above has been provided for illustrative purposes only.
Investment Tip - Core Satellite Portfolio
Although good active managers exist, identifying them in advance is challenging. More importantly, given the uncertainty that will always surround performance of even the best active managers, it may make sense to use them in combination with index funds to more effectively manage risk within a portfolio.
By using a blend of active and index funds from the same risk profile you can create a ‘core-satellite’ portfolio.
Index funds are cost effective and by combining them with actively managed funds, together, you can aim to outperform the benchmark at a lower cost than a 100% active fund alternative. Plus you may have the added benefit of reducing your risk.
What is it?
- The core is the index funds
- The satellite is the active funds
- A typical core satellite mix may range from 50:50 to 70:30.
This approach may provide you with a cheaper solution whilst still providing you with an opportunity of outperforming the benchmark...
Find me the right mix
- Identify your risk profile
If you don’t know what your risk profile is, take our Investor Profile Quiz.
- Choose a fund that suits your risk profile
Sandhurst offers five actively managed funds and five index funds that range from defensive to high growth which may match your risk profile. To find out more information, click here