How to build a diversified investment portfolio for maximum returns

Diversification is one of the most talked-about principles in investing, and yet one of the most poorly executed in practice. While almost everyone has heard the advice, “don’t put all your eggs in one basket”, applying it effectively to your own portfolio can be easier said than done.

At its core, diversification is about reducing risk without sacrificing return. It’s one of the few free lunches in investing, but that doesn’t mean it’s as simple as owning a bit of everything and hoping for the best. It's about owning the right mix, for the right reasons, at the right time.

Decide on your risk appetite first

Before you can diversify, you need to understand your personal risk profile. Are you risk-averse and inclined towards stability? Or are you in a position – due to age or financial circumstances – to stomach more volatility in pursuit of higher returns?

Younger investors, in particular, are well-placed to invest more heavily in equities. They have time on their side to recover from market dips and benefit from long-term compounding. But that doesn’t mean blindly investing in every available asset. Diversification should still be thoughtful and deliberate.

Local vs offshore allocation

When it comes to geographic diversification, a 60% local, 40% offshore asset split is usually a good starting point. This gives you access to South Africa’s potential for recovery and growth while also benefiting from global themes and currency exposure. It’s important, however, to be comfortable with both sides of that equation. Dollar gains are great, for example, until a strengthening rand or a correction in US markets cuts into your returns.

Diversify across sectors and themes, but don’t spread yourself too thin

Sector diversification is critical. Technology, commodities, and financials – each of these sectors moves differently through the broader economic cycle. Gold, for example, has done well recently. Financials continue to offer strong fundamentals. And the global technology sector remains compelling, especially those companies leading the AI revolution.

That said, diversifying across sectors doesn’t mean investing in everything. You don’t need exposure to every theme to build a well-rounded portfolio. Select a few key sectors that you understand and believe in. Then focus on quality companies within those sectors.

As a rule of thumb, 20 to 25 shares are more than sufficient to achieve meaningful diversification. Anything beyond that tends to dilute your returns and reduce clarity in your portfolio. As Warren Buffett puts it, wide diversification is only required when investors don’t know what they’re doing.

What about ETFs and unit trusts?

There’s no one-size-fits-all answer here. Shares, ETFs, and unit trusts all have a place in a well-structured portfolio.

For investors who prefer a lower-volatility approach and don’t want to manage individual positions, unit trusts and ETFs offer an easy entry point. Certain index-tracking ETFs can be especially useful for gaining broad exposure to offshore themes or entire markets. Remember, however, to account for fees as you'll be paying a management fee to the issuer of the ETF.

Individual shares, on the other hand, offer the advantage of direct control over investment decisions – including what to buy and when to sell. There’s also the potential to outperform passive instruments, especially in local markets, where active managers have a better track record over shorter timeframes.

Just be aware of the risks involved. A poorly chosen stock can lead to substantial losses, as much as 80%. So do your research, be selective, and ensure that your portfolio has a balanced mix of stable and high-growth assets.

What’s attractive right now?

We’re in an interesting time globally. With interest rate cuts on the horizon and geopolitical uncertainty on the rise, there’s renewed investor interest in emerging markets – South Africa included. So far this year, local equities have delivered strong returns, and there’s optimism around improved local growth prospects through 2025.

The offshore technology sector – particularly e-commerce and AI – continues to present long-term investment appeal, despite recent pullbacks in stocks like NVIDIA. Companies such as Alphabet, Amazon, and Microsoft have invested heavily to accelerate their AI capabilities. For investors seeking long-term growth, maintaining exposure to these innovation leaders remains a compelling strategy.

* Myers is the head of securities at PSG.

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