Types of investments • 3 min read
When we speak to our users – especially those who have invested before – one of the key questions that comes up is: “Are your portfolios sufficiently diversified?” This is a great question. As any seasoned investor knows, a key principle of investing is ensuring that your eggs aren’t all in one basket.
With a well-diversified portfolio, if a specific company, sector, or geographic region underperforms, the losses in one area can be offset by the gains in another. Not only that, but as the Nobel Prize winning economist Harry Markowitz once put it, “diversification is the only free lunch” in finance. It’s a strategy that can limit risk and still achieve a positive return.
At CIRCA5000, all our investment themes and fund options are designed with diversification in mind. We approach this in four ways and our investment platform is designed to help you get the most out of each factor.
Is that a diverse enough number? Investors and academics have debated this topic for decades. However, recent studies suggest that 30-50 companies is usually enough to avoid taking on too much company-specific risk. In our view, exposure to 300+ companies goes over and above what’s recommended to limit the risk of being too exposed to any one company.
It might be tempting to think that holding 50+ companies in a portfolio reduces risk. However, this selection would be far from diversified if all the stocks operated in the same industry. For example, if you held 50 food companies you would be overly exposed to a variety of risks in the sector, such as the rising costs of ingredients and supply chain disruptions.
This is why CIRCA5000 portfolios are diversified across industries. Given our focus on investing in the future, our largest sector holding is technology. However, users who choose the People & Planet model benefit from diversity across other sectors such as healthcare, industrials, consumer products, utility companies, and basic materials businesses. This diversification reduces the risk of overexposure to any one sector.
Investing in many dozens of companies across multiple sectors is a good start in terms of diversification, but you can go further than that.
Long term investment success also requires exposure to a variety of economies across the world. And while geographical diversification reduces the risk of having exposure to just one country or region, it also provides the opportunity to gain from the growth of fast-growth economies.
Several companies in the CIRCA5000 themes sell their products and services in over 150 countries and so their revenues aren’t tied to one location. Not only that, but our model portfolios have companies whose shares are listed across the stock markets of over 40+ countries.
The final piece of the puzzle involves diversifying investments across time. Although it’s possible to buy a diversified portfolio today with hundreds of companies across sectors and countries, there’s still the risk that you might buy at a time when share prices are too high – or at a time when the mix of companies available doesn’t include businesses that generate higher future returns.
This is why we designed the CIRCA5000 app to include features like monthly top-ups and weekly round-ups. These features allow you to diversify your investments across time by setting up automated regular investing. This way, instead of getting into the market at just one point in time, you spread your investments across several weeks, months, and years.
This concept of regular investing is known as dollar – or pound – cost averaging. In essence, it “averages” out the price you pay to enter the market since your investments are spread out over time. With this strategy, investors can eliminate the need to attempt timing the market perfectly.
Capital at risk