Thanks to their tendency of outperforming every other asset over the long term, we can be fairly confident in our predictions about where equity markets will be 10, 20 or 30 years from now. Next year? Well, that’s a far more difficult — some would say utterly futile — exercise.
Nevertheless, the fact that no one really knows where we’re headed over the short term doesn’t mean that investors can’t take action to ensure they can meet any seismic events with something approaching indifference.
The best way of bulletproofing your share portfolio for 2018? Yes — you’ve guessed it — diversification.
Safety in numbers
For those who prefer to err on the side of caution, can’t follow day-to-day market movements, or have little interest in investing beyond recognising that it’s a great way of growing their wealth, exposure to a variety of stocks makes a whole lot of sense.
One way of diversifying your holdings is through geography — something definitely worth considering with Brexit on the horizon.
Black swan events aside, the important thing to realise is that not all stock markets behave the same. Moreover, the worst performing market one year is often (but not always) one of the best performers in the following year. Emerging markets, for example, lagged pretty much everything else in 2008. In 2009, they were the top performing sector. Exactly the same pattern occurred in 2015 and 2016.
So rather than attempt to predict which will perform best in any one year, it’s worth having exposure to a number of markets. Perhaps the most convenient, cost-effective and least risky way of achieving this is to buy a group of exchange-traded funds or, alternatively, a single global tracker that assigns different amounts of your capital to different areas.
Having made sure that you’re not totally reliant on UK plc, another consideration, as far as equities are concerned, relates to sector diversification. This is important given that some parts of a single market will perform better than others depending on where in the economic cycle we happen to be.
Buying a bunch of housebuilders and very little else is flirting with disaster, particularly if the housing market takes a dive. The same goes for retailers if consumer spending shows signs of slowing. A portfolio composed just of oil stocks won’t do you any favours if the price of black gold tanks like it did a couple of years ago. You get the idea.
A housebuilder, a consumer goods stalwart, a bank, an energy giant, a miner, a pharmaceutical or two, an engineer, a few tech-related stocks? Now we’re talking.
One last aspect of diversification worth considering is your approach to investing.
Some market participants like to rigidly adhere to a particular strategy, labelling themselves as growth hunters or small-cap specialists. To muddy the waters, some will label themselves as small-cap growth investors.
Not only is this tendency unnecessary, it’s also potentially bad for your wealth given that certain strategies perform better than others at different times (growth-focused stocks have trumped those offering value in recent years). As such, those looking for a smoother ride to riches should consider having a mixture of different kinds of companies (large, small, undervalued, new, established) in their portfolios. While less exciting than finding the next Amazon or Apple, your returns should be far more consistent.
Are you ready for Brexit?
Taking action to ensure your portfolio is properly diversified is surely more important than ever before as the UK gets ready to separate from the EU.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.