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 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 MSCI All Country Index which can be bought in various currencies (ticker: ACWI in EUR and URTH in USD). The MSCI All Country Index captures large and mid-cap representation across 23 developed markets/ countries and includes 1,645 constituents.
Year-to-date, the MSCI All Country index returned 1.25% (euro) and 12.80% (dollar) to shareholders. The difference in performance is mainly due to the euro/dollar fluctuations during the period.
However, taking a 5-year view, the same index returned 71% (euro) and 69% (dollar) to shareholders.
The largest equity holdings within the MSCI All country Index are as follows:
1. Apple Inc (5-year total return 87%)
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. Microsoft (5-year total return 175%)
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.
3. Facebook (5-year total return 771%)
Facebook, Inc. operates a social networking website. The company website allows people to communicate with their family, friends, and co-workers. Facebook develops technologies that facilitate the sharing of information, photographs, website links, and videos. Facebook users have the ability to share and restrict information based on their own specific criteria.
4. Amazon (5-year total return 284%)
Amazon.com, Inc. is an online retailer that offers a wide range of products. The company products include books, music, videotapes, computers, electronics, home and garden, and numerous other products. Amazon offers personalised shopping services, web-based credit card payment, and direct shipping to customers.
5. Johnson & Johnson (5-year total return 126%)
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.
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 are 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. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.