Saxo’s five steps for achieving a well-diversified portfolio

These five steps can help investors establish a well-diversified investment portfolio, Saxo says.

Saxo unravels the secrets to building a diverse portfolio. Pic: Getty Images.

• Saxo reckons there’s five key steps to achieving a well-diversified investment portfolio

• While diversification is a key investment strategy, Saxo said investors often struggle to put it into practice

• Saxo said regularly reviewing your portfolio helps maintain a diversified portfolio, balancing risk and opportunity

 

Special Report: While diversification – spreading investment risk across various geographies, sectors and asset classes - is a key tenet of investing, many investors struggle with practically applying the strategy, according to online trading platform Saxo Markets.

Saxo Head of FX Strategy Charu Chanana said investors should undertake these five steps to consider their portfolio’s level of diversification.

• Gather all your investment information

Chanana said investors should start by listing all their investment accounts, including brokerage accounts, superannuation accounts, savings accounts, and any other financial holdings.

She said this ensures a full picture of your portfolio, but it's important to list all assets.

“Make sure to include stocks, bonds, mutual funds, ETFs, real estate, cash or cash equivalents, and alternative investments like commodities or cryptocurrencies,” she said.

• Categorise Your Investments

Chanana said that, within their equity holdings, investors should categorise stocks by industry sectors such as technology, healthcare, financials and resources.

Investors should then consider geographical exposure and asset allocation.

“Take a look at whether you're missing exposure to certain asset classes,” Chanana said.

She said understanding the balance of your exposure between dividend-paying and non-dividend-paying stocks, along with growth versus value stocks, is also important.

• Analyse your risk exposure

Chanana said investors should then determine what percentage of their total portfolio is allocated to each asset class, sector, and geographical region.

She said they could then consider concentration risk and identify areas where they might be overexposed.

“Look for sector concentration by reviewing how much of your equity portfolio is in specific industries,” she said.

“For instance, if more than 30% of your portfolio is in tech stocks, you may want to consider diversifying into other sectors like healthcare or energy.”

You should also determine if your investments are primarily in one region, where you may be exposed to country-specific risks.

“If they are mostly in one region, such as Australia, you may want to think about adding more international exposure,” Chanana said.

She adds that it’s important to also consider whether your portfolio is too heavily weighted in one asset class.

“For example, if you hold primarily stocks, you might consider adding bonds, real estate, or commodities to create a more balanced portfolio.”

• Consider your risk tolerance

Chanana said it was important for investors to compare their current portfolio allocation with their risk tolerance.

“If you're not comfortable with the level of risk, you could consider reallocating to more conservative investments like bonds or stable dividend-paying stocks,” she said.

• Adopt a core-satellite approach

Chanana said there are several actionable strategies for investors to effectively enhance their portfolio diversification – one being the core-satellite approach.

It’s an investment strategy that combines passive, low-cost investments as the core with more targeted, higher-risk, actively managed investments as satellites.

“The goal is to achieve long-term, stable growth with the core while using satellites to pursue higher returns through active management and more focused strategies,” she said.

Chanana said the core was the stable foundation of your portfolio, typically consisting of low-cost index funds or ETFs that track broad market indices across multiple sectors, asset classes and regions.

“The goal is to provide steady, long-term growth with lower volatility,” she said.

“Examples include S&P 500 ETFs, total international stock index ETFs, or global bond ETFs.”

Chanana said the satellite component involved smaller, actively managed positions that focus on specific sectors, themes or high-growth opportunities.

“Satellites are meant to enhance overall returns and take advantage of market trends without increasing the portfolio’s risk too much,” she said.

They could include sector-specific ETFs (e.g., tech, healthcare or energy sector ETFs) if you believe certain industries are poised for growth.

“Investing in emerging markets provides exposure to fast-growing economies, albeit with higher risk,” Chanana said.

“Consider themes like clean energy, artificial intelligence, or ESG investing for added focus.”

Chanana said investors might also consider commodities or real estate either through direct investment or through REITs and ETFs.

“This balanced approach ensures that the majority of your portfolio remains stable and aligned with long-term market growth, while the satellite investments offer the potential for outperformance without significantly increasing risk,” she said.

“Typically, the core investments should make up around 60-80% of your portfolio, while satellite investments should make up the remaining 20-40%, but the breakdown will depend on your risk tolerance.”

Diversify across asset classes and regions

Chanana said to achieve well-rounded diversification, investors may consider spreading investments across multiple asset classes, sectors and regions including:

• Equities

“Ensure you have a mix of large-cap, mid-cap, and small-cap stocks, and consider adding international stocks from both developed and emerging markets.”

• Fixed Income

Chanana said bonds can provide stability.

“You may want to explore options such as government bonds, corporate bonds, and bonds with different durations and credit qualities.”

• Commodities

“Gold, silver, or oil may provide diversification, and you could explore these through commodity ETFs.”

• Sectors

Chanana said to mitigate sector-specific risks and capture growth, consider diversifying investments across various industries.

“This can help you reduce the impact of industry-specific downturns and potentially capture growth in various segments of the economy.”

• Geographical diversification

Chanana said to spread risk and potentially enhance returns investors should consider diversifying their portfolio geographically including developed, emerging and frontier markets, along with a regional and global focus.

“By incorporating investments from different geographic regions, you can reduce your portfolio’s exposure to any single country's economic conditions and benefit from diverse growth opportunities worldwide.”

Consider Dollar-Cost Averaging (DCA)

Rather than investing a large sum at once, dollar-cost averaging involves investing a fixed amount of money at regular intervals.

“This approach can help smooth out the impact of market volatility and allow you to build a diversified portfolio over time,” Chanana said.

“Setting up automatic contributions to your investment accounts may be considered to ensure consistent and disciplined investing.”

Regular Rebalancing

Chanana said, over time, some investments will grow faster than others, potentially leading to an unbalanced portfolio compared to your target allocation.

“Consider rebalancing periodically to ensure your portfolio stays aligned with your original asset allocation,” she said.

“Review your portfolio quarterly or annually to check if any asset class or sector has deviated significantly from your target allocation.

“Sell a portion of over performing assets and use the proceeds to buy underperforming ones to bring your portfolio back into balance.”

Instead of selling, you can also rebalance by directing new contributions to underweighted areas of your portfolio.

Individual circumstances are important as well. Major life events like marriage, buying a home, or retirement could significantly impact your financial goals and risk tolerance.

“Review your portfolio after these events to ensure your diversification strategy still aligns with your new circumstances,” Chanana said.

“By considering these strategies and regularly reviewing your investments, you can maintain a diversified portfolio that balances risk and opportunity, aligned with your financial goals.”

This article was developed in collaboration with Saxo Markets, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

Originally published as Saxo’s five steps for achieving a well-diversified portfolio