Diversify to maximize your portfolio potential

Diversification has always been considered a good investing principle for managing risk in your portfolio, but it has another upside too. By investing your money in different types of assets, markets, or accounts, you enable different qualities and strengths to play out in your portfolio.

It’s a bit like putting together a top-performing sports team. There are defenders that try to lessen your risk, but you’ll also want players that drive the objectives of the game in different ways. You’ll want some that deliver on speed, some that are robust and resilient, others that are strategically strong, and others that perform consistently.

Your likelihood of success increases because of the mix you have and how they are able to complement each other; each bringing something unique to the game.

Here are some ideas for how you can up the ante by using different “players” in your portfolio:

Stocks

When you embark on your investing journey, stocks become your starting point. They offer you the opportunity to invest in well-known brands with a reputation and a history of performance. As you choose your stocks, it's important to consider diversification and ensure that you don't overexpose yourself to a single industry. By spreading your investments across different sectors, you can enhance the potential for growth and reduce risks.

Here are some other themes to think about:

Small-cap or Penny stocks

Small-cap stocks, also known as penny stocks, are stocks that trade at a lower share price, usually below R5/$5, etc. These are smaller companies listed on an exchange that haven't been around for as long as their mid and large-cap counterparts. It's important to remember that all major companies started out as small-caps at some stage, so the benefit of investing here is the huge growth potential unmatched by larger companies. While considered more volatile, small-caps could have a place in your portfolio to provide an opportunity for that additional growth boost.

Tip: Financial Mail has a segment called Hot Stocks that covers local small cap stocks regularly. Investors Monthly editor Marc Hasenfuss writes about them in many of his contributions.

Offshore stocks

Exchange rates can potentially offer an investor an additional opportunity to make a return on their investment because they are not only getting the potential benefit of a share's growth, but they are also getting the potential benefit of the Rand weakening while an offshore currency strengthens in value. This results in an increase in the value of their overall investment as well.

Tip: We regularly highlight offshore stock opportunities in our research portal. Access US, UK, Australian and European stocks by activating these accounts in your EasyEquities profile menu.

Dividend paying stocks

While not all companies pay dividends regularly (or at all), there are some that have a good track record. Dividends can come from portions of a company's profit that are shared with its investors from time to time as a reward for their loyalty and shareholding. These dividends can be reinvested to give your portfolio an additional boost in contributions, without having to deposit more money into it. Alternatively, they could be used as an additional stream of income, providing you with the flexibility to use the extra funds as you wish.

Tip: You can read about which companies pay dividends each week here.

Exchange Traded Funds

Exchange traded funds are a solid diversification tool in their own right. They are made that way, as they track a collection of stocks or other instruments. What’s nice about investing in ETFs is how they are themed: you can basically use a few differently themed ETFs to build a multi-talented team cheaply and without too much effort.

Dividend themed

As mentioned above, dividend paying companies can be a really useful player in your portfolio. If picking individual stocks seems like too much of an effort, you can invest in a dividend themed ETF which will give you access to a selection of companies that pay dividends. Depending on the strategy of the ETF these dividends may automatically be reinvested, or paid out to you, usually quarterly.

Tip: Use this left-hand “Dividends” filter on this finder to view dividend paying ETFs and sort by those that pay out or reinvest.

Offshore themed

While you do have access to offshore markets in your EasyEquities account in the form of individual stocks, ETFs provide a much greater variety. Want to invest in the Chinese market or in Emerging markets (this includes a number of different countries)? There’s an ETF for that. You’re not solely limited to the big players like the US or Europe.

Tip: Use this left-hand “Region” filter on this finder to view offshore ETFs and sort by specific region.

Momentum themed

Momentum stocks are those that are considered to have significant growth in their future. ETF fund managers do an analysis that provides them with a selection of companies that could fall under this category, and these are grouped together in a momentum-themed fund. Similarly to investing in small-cap stocks, this can provide you with an opportunity to see exponential growth in your portfolio. But because it is already diversified, the risk is slightly lower.

Tip: Search “Momentum” using this finder to view momentum themed ETFs and sort by provider.

Crypto

Crypto is notoriously volatile and so considered a high-risk investment. We’ve also seen how when it rallies, it rallies hard and can produce some game changing results for your overall portfolio. There’s a balance somewhere in between that can offer you that potential upside, without taking on too much of the risk. Many believe that holding between 1 and 5% of your portfolio in crypto is a good principle to follow. That way when it shoots the lights out, you get the benefits. But if it temporarily tanks, your portfolio is only slightly affected. The truth is, crypto is here to stay and could be a major player in how we transact in the future. For these reasons many believe, despite its volatility, that it’s worth holding as a long-term investment.

Tip: You can invest in an already diversified crypto bundle that holds the top 10 currencies by market cap called the EC10 in your EasyEquities ZAR account. You can also get a wider variety of bundles as well as individual coins by activating your EasyCrypto account. More on that here.

Property

Here’s one that you may want to consider as both a defense and an offense player. There is a lot of evidence that has shown the property sector to be somewhat of a safe haven during times when the stock market is under strain. Additionally, there’s even evidence that it’s experiencing a post-pandemic surge.

And while many investors are put off by the capital outlay, maintenance and hidden costs of owning a physical property; new prop-tech innovations have paved the way for a much lighter touch, affordable experience that delivers on the benefits associated with owning property.

You can invest in property using EasyProperties, which exposes you to assets that have been selected by a panel of experts based on sound investment cases. These investments can provide you with rental income, potential growth on your investment and liquidity – you are able to buy and sell your stake at quarterly auctions.

Tip: More on how EasyProperties works and how you can access it from your EasyEquities account here.

Tax Free Savings Account

This might not be an obvious star player, but the benefits are impossible to ignore. They key is in the name: ‘Tax Free’.

If you didn’t already know this, you pay tax on any profit you make on your investments, any dividends you receive and any interest you earn. Yep – a portion of your spoils goes to South African Revenue Services (SARS). Think of this as paying an agent’s commission to have a top player on your team. Except that the agent who represents investments in your TFSA doesn’t charge you anything. Anything you invest in your TFSA is tax free – think of how that impacts the value of your investments? All those bits that would normally go to SARS stay invested, potentially earning you returns that you can 100% keep instead of sharing.

Tip: This blog on calculating the potential returns on your TFSA is sure to give you FOMO. If you want to know more about how TFSAs work you can watch a video tutorial about that here.