Equity markets can offer investors attractive returns but investing in an all-equity portfolio is a risky strategy. Equity markets are volatile and can underperform cash over long periods. For example, an investor who earmarked all their money to equities at the start of the millennium would not, until 2013, have beaten another investor who’d put all their money in cash.
A diversified approach can provide a solution to the risks inherent in equity investing.
Investing in a equities from different geographical regions supports the stability of the portfolio as this results in different drivers of returns. For example, correlations between developed markets and emerging and frontier markets are generally lower than within developed markets. Intra-country correlations within emerging and frontier markets are also low given their diverse nature.
Allocating across various sectors – defensive and cyclical – and across a mixture of large-cap, mid-cap and small-cap stocks will provide another source of diversification. Some investments are likely to rise or retain their value when others are falling.