4 benefits of a diversified portfolio

Recently booming stock markets could have many wondering whether now is the right time to get started on an investment journey. The most widely followed index of US stocks, the S&P 500 index has recently traded at all-time highs and is up more than 50% from 2022 lows. The most popular measure of global stocks, the MSCI World index is up a similar amount. Should you fear a market plunge or should you fear missing out? The answer: drop the emotions and come up with a plan that removes any need to even make decisions.

Remember: timing the market is impossible.

A first principle of investing is that it is impossible for the vast majority of us to time the market, and data shows that individual investors on average are very poor at doing so. Poor timing is a natural result of swings of human emotions - fear and greed - that are triggered by market gyrations. People are usually least invested and holding the most cash when the market is doing worst (fear!) and piling into the market and holding little dry powder in the form of cash when the market is close to or at a major top (greed!). But rather than worry, we can only rely on the fact that over all long historical time frames stock markets have always drifted higher.

How to get started right now while minimising the decision-making.

In short, "right now" is always the right time to start a long-term investment journey, especially if you are investing from a monthly income stream. And even if you are starting with a large lump sum and you are concerned about putting all of your funds to work in markets at once, you can offset those concerns with a  dollar-cost-averaging approach to market entry. This is simply a plan to choose a schedule for entering the market over coming weeks or months - for example, every third week over the next few months or every month over the next eight months. 

The other way to remove decision making from the process is to get started with a broadly diversified approach, spreading your investments over several, not-too-closely related assets and, within equities, over not closely related sectors, industries and geographies. That can be achieved with just a couple of funds, by the way, or with a more nuanced approach - but more on that later.

In short, there are at least four reasons to start an investment journey right now and with a diversified portfolio. You can also skip straight to the 3-step plan for starting a diversified portfolio.

1. Having a plan makes it easier to take action

Deciding what to do with your hard-earned savings can seem too monumental a task as you may not know where to invest or even whether to get started. But having a plan in hand shortens the time to getting started and moving toward your long-term savings and investment goals and getting the returns that the markets can offer.

2. Avoid regret

The chief advantage of choosing both broad diversification and dollar cost averaging is the reduction and even elimination of decision-making. A diversified approach for some or all of your funds avoid making any major decision on what to invest in. Dollar-cost-averaging avoids making market-timing decisions. This is mostly relevant only if you have a large pot of savings to invest, of course. If you are investing from monthly income, dollar-cost-averaging is simply about committing to set aside a fixed amount to invest from every paycheck.
Remember: doing nothing is also a decision you might very well regret. If you remain in an undiversified selection of a few stocks only or have funds piling up in a low-yielding bank account, you're certain to regret if your investments sour relative to the broader market in the former case and in the latter case, you would regret the missed opportunity if the market continues to soar while your funds languish with no returns.

3. Diversification reduces risks and smooths returns

A diversified portfolio won’t perform as well as the best performing sectors or industries or certainly single companies in the market – that is unavoidable. On the flip-side, a diversified portfolio of not-too-closely related assets will also reduce the risk of poor outcomes if one asset class or company implodes suddenly. This helps smooth returns as asset classes tend to perform differently in varying economic conditions. The aim is to smooth out the overall volatility of your portfolio.

4. You’ll likely participate in the Next Big Thing

Many times, in many market environments, strong broad market returns are driven especially by particularly strong sectors or industries, like pharma in the 80’s and 90’s, info-tech over the last couple of decades, and AI for the last few years. Your diversified portfolio will have exposure to these key sectors too if you own the broader market.

But what about the risks?

No course of action is without risk and the approach outlined above also has one over-riding risk for those who don’t invest all of their savings all at once from the get-go: the risk that the target investments continue to perform very well before the investor invests all savings.

Next steps

Making an action plan: Click here to see the simple, customizable 3-step plan
An even simpler action plan, including some specific funds for inspiration: Balance your risks with a diversified portfolio