- Diversify to reduce risk
- Spreading your risk between more than one asset or asset classes gives you the potential for varying returns
- A well-diversified portfolio is designed to be more resilient in more market environments
Brought to you by Hobson Wealth Partners
Andrew Carnegie, the Scottish-American industrialist, led the expansion of the American steel industry in the late 19th century and is often regarded as one of history’s wealthiest people. He became a leading philanthropist and in his latter years is believed to have given away almost 90% of his fortune, sparking a wave of large-scale philanthropy across the US and Europe with particular emphasis on libraries.
He famously said to an audience of students in Pittsburgh in June 1885: “Put all your eggs in one basket, and then watch that basket.” When it comes to investing, we are often taught to diversify to reduce risk. In simple terms, diversification is about not having all your eggs in one basket but rather spreading them across a number of baskets. This way there is less chance that one bad egg, or one dropped basket, will ruin everything.
Andrew Carnegie didn’t like people who scattered their capital, which in his mind meant “that they have scattered their brains also”. The steel magnate benefited first-hand from concentration and kept a close eye on his business interests. In modern New Zealand, the NBR Rich List shows that many of the country’s wealthiest have made their money from concentrating their efforts and energy on one investment or in one sector and that strategy has been the key driver of their wealth creation.
For the average investor, however, the same is unlikely to be applicable. A concentrated investment strategy suffers from greater volatility, leads to more sleepless nights and runs the risk of losing it all should that particular “egg” break. The principle of diversification is easy to understand and in most cases offers important benefits.
Spreading your risk between more than one asset or asset class offers the potential to get varying returns. Fixed interest investments are typically lower risk and provide income while shares offer equity ownership and arguably more upside but with that comes the risk of your return fluctuating in line with the fundamental performance of the underlying asset. By spreading your risk among a variety of options, you can reduce the effect of one negative result on your whole portfolio which lowers the overall investment risk. A well-diversified portfolio is designed to be more resilient in more market environments.
One of the key trade-offs is that of risk versus return. At Hobson Wealth Partners, we construct client portfolios that seek to maximise returns based on a given level of risk and to do this we rely heavily on a diversification approach.
Andrew Carnegie would not have achieved the great successes in his life had he not been a believer in concentration. In effect, he was taking more risk by concentrating everything in steel but in doing so, he achieved a far greater return. For most of us, however, diversifying investments is a way to reduce the risk of a tumble in markets, and losing what we have worked hard to save.
At Hobson Wealth Partners, we construct client portfolios that seek to maximise returns based on a given level of risk and to do this we rely heavily on a diversification approach.
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