Diversification refers to the spreading of risk by placing assets in a variety of investment classes and in a broad range of investments within each class.
Unfortunately, a lot of investors do not have well-diversified portfolios. When markets are trading in positive territory, everyone is happy. However, when the markets suffer a drawdown, a lot of investors end up with large losses in their portfolio and a level of risk which is much higher than what they should be taking.
It is paramount that before you start adding stocks to your portfolio you know what your risk-reward ratio is and you take the time to fill up your Investment Policy Statement. This process will help you identify whether each trade you make is contributing to obtaining your long term goal.
If you lose focus on your long term goal and start taking short term bets, your portfolio will turn from an investment strategy into a gamble, thereby increasing the chances of you making a much greater loss than you can afford to take.
When you start building a portfolio, Exchange Traded Funds (ETFs) will help you meet your goals. These instruments should form the core of your portfolio. Once you are happy with the core, you may then add satellite holdings which, if you get right, will increase your potential returns over and above the return of the market, better known as alpha.
There are many market ETFs which could form part of the core of a portfolio. One of them is the iShares MSCI World ETF (URTH US EQUITY). The MSCI World Index captures large and mid-cap representation across 23 Developed Markets countries and includes 1645 constituents.
Looking at the first six months of the year, the MSCI World only returned 2% to shareholders. However, taking a 3 year view, the same index returned 51% to shareholders.
The largest equity holdings within the MSCI World Index are as follows:
- 1. Apple Inc (5-year total return: 271%)
Apple Inc. designs, manufactures, and markets personal computers and related personal computing and mobile communication devices along with a variety of related software, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, third-party wholesalers, and resellers.
- 2. Exxon Mobil Corp (5-year total return: 67%)
Exxon Mobil Corporation operates petroleum and petrochemicals businesses on a worldwide basis. The Company's operations include exploration and production of oil and gas, electric power generation, and coal and minerals operations. Exxon Mobil also manufactures and markets fuels, lubricants, and chemicals.
- 3. Microsoft Corp (5-year total return: 120%)
Microsoft Corporation develops, manufactures, licenses, sells, and supports software products. The Company offers operating system software, server application software, business and consumer applications software, software development tools, and Internet and intranet software. Microsoft also develops video game consoles and digital music entertainment devices.
- 4. Johnson & Johnson (5-year total return: 94%)
Johnson & Johnson manufactures health care products and provides related services for the consumer, pharmaceutical, and medical devices and diagnostics markets. The Company sells products such as skin and hair care products, acetaminophen products, pharmaceuticals, diagnostic equipment, and surgical equipment in countries located around the world.
- 5. Wells Fargo & Co (5-year total return: 147%)
Wells Fargo & Company is a diversified financial services company providing banking, insurance, investments, mortgage, leasing, credit cards, and consumer finance. The Company operates through physical stores, the Internet and other distribution channels across North America and elsewhere internationally.
Disclaimer:
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.