Portfolio reviews and diversification

Last week my colleague Dwayne highlighted the importance of reviewing your portfolio. As he mentioned, a “set it and forget it” approach does not truly allow an investor to maximize their portfolio returns. Ignoring your portfolio and not rebalancing is akin to never servicing your car. Eventually it will break down. This week, I want to share with you one of the important steps in reviewing your portfolio, which is diversification.

Diversification is a strategy that mixes a variety of investments within your portfolio to reduce portfolio risk. Diversification goes hand in hand with asset allocation. Market conditions change over time and 2022 has been no exception. Current market volatility has certainly affected the performance of assets in most portfolios. As this happens the prudent investor should review the diversification of their portfolio.

Strategically diversifying focuses on creating a balanced portfolio that aligns with your financial goals. An investor should look to include asset classes that provide predictability and growth. As we have no magic crystal ball to predict the future, through diversification an investor protects himself from having to make rash decisions when the unpredictable occurs.

An investor can diversify based on assets. Your financial advisor will help you strategically select which assets align with your portfolio goals. After asset level diversification, investors can further diversify their portfolio by including assets from various sectors. Sector diversification includes holding assets from various operating and geographical sectors. Market fluctuations affect sectors differently, no one sector will always be on top or the best performing, having various operations in your portfolio will protect you from a downturn in one area. Additionally, widening your geographic exposure offers a certain level of protection. Each country's economic performance is different and not all financial markets are intertwined. A geographically diverse portfolio will lessen the risk of exposure to volatility in one economic region.

As an investor you may also reap the benefit of diversification through a professionally managed fund. Before selecting any fund speak with your financial advisor to see if the fund aligns with your financial goals. Understand the risks associated with the funds and the fee structure associated with them.

Always remember, investing is a personal experience. Your objectives and circumstances will change over time and a one size fit all strategy is never wise. Reviewing and rebalancing your portfolio is a necessity while you navigate your financial journey.

Christine Rankine is the Manager -Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.