Diversify your investments; a prudent approach
Submitted by Agrawal Associates on August 20th, 2017August 21, 2017
How can you get better rates of return in your investments with lower risk? One prudent principle followed by all of the advisors at Agrawal Associates is to encourage diversification in your investment portfolio.
Diversification is just one of Girish Agrawal’s prudent principles for investment management to help guide clients through effective wealth management. Diversification helps investors spread their assets across multiple sectors and markets, helping to minimize long-term risk.
Each area of the market rises and falls. Without a crystal ball, it’s impossible to predict the timing of the dips. That being said, a well-diversified portfolio can help an investor feel less impact from market drops and enjoy a more positive long-term outcome.
Asset allocation versus diversification
While asset allocation looks at the balance between fixed income, equity, and cash, diversification looks at the diversity of investments within those asset classes. A prudent investor should be guided by their advisor to include both asset allocation and diversification in their investment portfolio.
“Just within equity, we want to see diversity in markets, sectors, and geography,” explains Ajay Kumar, a Certified Financial Planner at Agrawal Associates.
“Clients should consider diversifying their equity investments across different sectors, such as banking and consumer goods,” Kumar explains. “Next, consider diversifying equity across geographic areas; USA, Europe, Canada, or emerging markets..”
Kumar also advises clients to consider diversifying across markets; small capitalization, medium cap, and high cap.
Asset classes
Fixed income – income from an investment set at a specific dollar amount and isn’t impacted by inflation changes
Equity – investments with a variable rate of return, depending on performance
Cash – investments which are immediately cashable with or without penalty (or simply keeping your money in a savings account)
Avoid total correlation
With more than 20 years’ experience in the financial industry, Kumar has one primary recommendation for diversification: “Avoid total correlation of your investments.”
Investments with negative correlation have a natural seesaw effect — one investment will go up as the other goes down. This negative correlation means that at the same time you’re experiencing a high in one investment, the other will be symbiotically low. This enables your opportunity to take advantage of the Efficient Frontier and Rebalancing – two more prudent principles of investment management.
Balanced diversification
Investors should also ensure that their diversification is properly weighted.
“No one area should have more than 20 per cent of your portfolio, or less than five per cent,” explains Kumar. “If you have more than 20 per cent in any one area, you’re exposed to too much risk if that area should drop.”
Likewise, he explains that an investment with less than five per cent of your overall portfolio won’t get the attention it needs to monitor growth or losses.
An experienced investment manager can help you analyze your existing portfolio, and ensure that it is properly diversified and weighted for the maximum opportunity for growth with the minimal amount of risk over the long term.
- Agrawal Associates
