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Diversification: The key to long-term wealth creation

In our previous editorial, we discussed important considerations for the different stages of life (link to article: https://www.27four.com/investing-through-your-life-stages/) and how having a sound financial plan may assist you in achieving your life goals. Having a sound financial plan provides you with a clear path and robust wealth creation strategy to meet those objectives.

To increase your chances of achieving your goals, it is crucial to adopt an approach that gives you the best possible outcome over time. At 27four, we believe that having a diversified portfolio provides you with that opportunity.

So, what is diversification and what does investing in a diversified portfolio actually mean?

Diversification refers to the combining of various asset classes with low correlations to one another. This strategy helps to minimise risk or volatility by spreading your wealth across assets that react differently to similar events. The primary objective of diversification is to minimise losses and, ultimately, increase your chances of reaching your goals.

Let’s consider the example of time horizon (the duration you have to invest in the market) to understand how diversification can help you achieve your goals. Equities, or stocks, tend to be more volatile in the short term but offer higher growth potential over the long term. On the other hand, bonds and other short term income instruments are generally less volatile than equities, providing stability against market unpredictability but offering lower long-term returns. Trying to time the market consistently is almost impossible, so it is important to carefully consider the risk-return trade-off during the time you spend in the market.

If you are younger with a longer time horizon, being too conservative can negatively impact your portfolio’s growth rate, potentially leading to insufficient savings for retirement.  Conversely, if you are nearing retirement, investing too aggressively in risky assets can expose you to volatile market movements, putting your retirement savings at risk without ample opportunities to recover losses. Diversifying your portfolio reduces the concentration risk in a single asset class or instrument, limiting exposure to any market-moving event.

To construct a well-diversified portfolio, asset allocation is key. This involves spreading assets across various asset classes (equity, property, income and alternatives), sectors, geographies, currencies and instruments. Investing in balanced or multi-asset funds is the easiest way to achieve diversification within your savings portfolio. Risk-profiled balanced funds cater for various time horizons, and unit trust vehicles provide flexibility to make the necessary adjustments as goals and requirements change over time.

At 27four, we offer a range of diversified fund options, including the 27four Stable Fund of Funds, 27four Balanced Fund of Funds, 27four Asset Select Fund of Funds and the 27four Shari’ah Balanced Fund of Funds. These portfolios are multi-managed, multi-asset class, providing diversification by geography, asset class and fund manager. With these layers of diversification, the aim is to reduce non-systemic risk and enhance risk-adjusted returns. A multi-managed investment portfolio offers diversification benefits and improves overall risk and return efficiency.

Investing in a single-managed fund exposes the investor to risks associated with a specific investment house, while investing in a single asset class exposes the investor to market risks associated with that asset class. Investing across different asset classes, fund managers and investment strategies may provide a more stable long-term investment return. Optimal diversification leads to risk reduction and the opportunity to enhance potential returns per unit of risk.

27four, is an established investment house. We conduct extensive research on the investment manager universe and select the most talented investment managers. Our team then applies their expertise in portfolio construction to blend individual funds optimally, creating fund of funds’ portfolios which have been designed to outperform their respective benchmarks.

At 27four, we live investments.

We are constantly seeking new approaches and ideas to deliver future-ready solutions. Our investment approach aims to provide superior risk-adjusted performance over the long term.

We have a comprehensive range of funds that cater to every investment objective and risk profile. Our range of diversified and Regulation 28 compliant funds are ideal for long-term wealth creation.

We understand the objectives throughout the savings life cycle, and we believe that your assets at retirement should align with your future liabilities, such as income requirements during retirement. A diversified approach to portfolio construction can significantly enhance your chances of achieving your long-term savings goals.

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