Aside from low cost and simplicity, ETFs are appealing because diversification is built in. When you invest in the 40 biggest South African companies, you invest in different sectors and different regions. You even get a degree of asset diversification in the form of property stocks.
Last week, Stealthy Wealth asked me about my diversification strategy in this interview. Because I’m an ETF investor with a very long investment horizon, diversification is not high on my list of priorities. The question did make me wonder how I will diversify once I approach retirement.
When I think about diversification, I always consider three things: asset class, region and sector. My knee-jerk reaction to Stealthy’s question was that I want no more than 25% exposure in my portfolio to any of these things. By that logic, if the stock market crashes, I’ll have 75% of my portfolio comfortably sitting in property, bonds and cash. Hopefully those assets will see me through the crash and sustain me until my equity portfolio recovers.
There are, of course, mathematical formulas to determine the optimal degree of diversification, but because I’m nowhere near a mathematician, I couldn’t use them. I couldn’t even read them. In this episode I speak to Simon about the right degree of diversification. I look at 10X’s approach to the issue within my retirement annuity (RA). I question Simon’s 100 minus your age rule of thumb.
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