Investment Diversification

Christopher Mills
September 12, 2022

If there was ever a massive topic to cover when it comes to investing, it would be diversification. There are so many elements, and opinions, on this because everyone is different - there's no set formula to be applied, sadly. This means that I'm able to talk about diversification, mention mistakes I've made, and discuss various scenarios but at the end of the day, you need to decide what's best for you based on everything going on in your life.

Image Credit: kubera.com

I felt that one of the best ways to tackle this was to walk you through what my journey was like when it comes to diversification.

When I started investing, it didn't take long for me to hear about, "diversification". I explored this and started to realise that there was a lot to it. Here are three things that jumped into my mind immediately:

  1. Diversify geographically (some investments locally, some abroad)
  2. Diversify based on assets (property, bonds, stocks, etc.)
  3. Diversify brokers (lowering risk of one going bust)

I then realised that I could set things up locally and internationally, but then I'd need local property and international property, local stocks and international stocks, and so the combinations start to grow. Add a 4th diversification point (different brokerages) or a 5th (managed vs non-managed) into the mix and things start to become really complicated. And this isn't limited to 5, there are more! And, that's without even thinking about money available to invest - what do you do if you can't afford to invest into each, where do you start?!

At this point, I realised that without sufficient money, this would need to become a slow process. I'd need to start by diversifying with a few entities:

  1. A property - One to live in essentially.
  2. ETFs - I could get a few ETFs (what is an ETF?) to cover different asset classes.
  3. Brokers - I wouldn't use 1 brokerage but perhaps a few.

The property play wasn't a complex one in nature, it boiled down to finances so solving that simply meant coming up with the debt in order to purchase one. On the other hand, the ETFs and Brokers posed more complexity. Long story short, if I can remember correctly, I went with something along these lines:

  • Brokerage 1: A top 40 ETF (top 40 companies locally) and a Balanced Unit Trust.
  • Brokerage 2: An international investment (S&P500) and commercial property fund.
Image Credit: nerdwallet.com

Let's explore my thinking a bit:

Brokerage 1

I went with two brokerages because what would happen if one of them went bust? I went with a top 40 ETF because the fees were low (unmanaged) and a Balanced Unit Trust which was low risk but managed. This covered a number of angles for me.

Brokerage 2

Once again, reducing risk by not being with one brokerage only, I wanted some international exposure (it was still locally held, so not offshore) and commercial property seemed good so I got a fund with them that held companies like Growthpoint.

--

This felt good to me, I was contributing a small amount each month and was decently diversified. As the years went by, I opened another brokerage, and diversified further and so my grand plan was coming into reality!

But...

I ran into problems:

I was managing all of this myself, perhaps it was the control freak inside of me and not trusting someone to manage my money as closely as I would, or it was me wanting to learn rather than receive a monthly report. Either way, I was doing it myself and now I had to start managing a lot of different brokerages, asset types, and so forth. The more I built, the more time this took and that lead to not actually being diversified! I found that various funds at various brokerages had big overlaps. For example, when I finally sat down, opened Google Sheets, and wrote down all the funds and their underlying assets, I found a lot of overlaps - My international exposure was heavily focused on North America, and in very similar companies, I wasn't nearly as diversified as I thought I was. Now I was in a position where I literally had to recreate everything with a new plan - this was a huge amount of work!!!

Image Credit: edu.gcfglobal.org

I drew on a whiteboard, isolated the overlaps, figured out where I was overweight, and then did all the research around other investments that would balance my portfolio. That lead me to realise that I might need another brokerage which would add another level of complexity to the structure of everything. I can literally remember this like it was the other day, I remember thinking to myself, "maybe I'm thinking into this too much, I must just leave it and continue" - That was so incredibly tempting because I knew the next step was going to be scary and complicated. I look back, and I'm so glad I didn't settle and that I obsessively sat at my computer figuring it all out. I ended up consolidating my portfolio, I closed funds, transferred money between brokers, paid capital gains tax, bought new funds that would allow me to consolidate two funds and so the list went on. It was really scary because this was my life's savings that I was pushing and pulling, as a fairly simple retail investor.

Going back, what would I have done differently?

I don't actually know, a lot of me is happy I went through the process because it taught me how to balance a portfolio, it taught me to explore deeper, it taught me how to research, and a bundle of other things I probably never would have figured out. Of course, I could have simply hired someone to do all of this for me but I would have lost out on the understanding and I can assure you when you understand, you know where to put your money and that's not always where an advisor would recommend - trust me on that. I've met many financial advisors in my life, some are linked to specific funds and therefore only tell you about them, some have too many clients and therefore don't have the time for you. I have, however, met a few financial advisors who are great and who don't sell but rather guide you - that's the sign of a great financial advisor, they don't push the products, they push the education based on what you've shared with them, they're as much a coach as they are an advisor. Anyway, wanted to put it out there that not all advisors are bad...

Sidenote: Over the space of 2 months, I met with 15 different financial advisors, I took notes during every meeting, crafted my questions and thoroughly investigated this. I took this on as a project, I wanted to truly understand how the industry was operating and what approaches were available. It was a fascinating experience, one that I learned a ton from.

Moving on...

Okay, seriously, what would you do differently?

If I were pushed to answer this, I think I'd probably structure my approach a bit more. This doesn't necessarily address the diversification side of things directly but it would have set me up better. I didn't not do this but I could have done it better:

  1. Start with budgeting - I was really good at budgeting, the concept of spending less than I received and knowing where money was being spent was always natural to me. I created my expense tracker and obsessively kept track of expenses for well over a year. I wouldn't change anything I did here.
  2. Pay off bad debt - I studied for many years on a student loan and by the end, I had a lot of debt that I had to repay. I remember working flat out and saving everything I could so that I could get rid of that debt. The debt hung on my shoulders, it felt like I couldn't go forward until I sorted it out. It's a horrible feeling but I managed to squash it finally.
  3. Create an emergency fund - An emergency fund is essentially 3-6 months of expenses saved in cash in case something goes wrong. I did this but I didn't see it as an emergency fund, I simply saw it as savings. I'd probably have investigated more into emergency funds and rainy day funds, and created more structure around this. Of course, I didn't have the money at this point to do all of this but I would have liked more knowledge on it at the time.
  4. Increase my income - This is something I did fairly well, I managed to create multiple income streams, I worked full time, and ran my blog on the side which generated a decent amount of income. For many years, I was hustling flat out. I sold black bags door to door, I delivered pizza, I worked in a bar, I waited tables, I re-programmed alarm systems, I sold computer parts... I was driven to make some cheddar!

I feel that those four components are essential before even thinking about investing. You need to get rid of debt before you invest, you need to understand what you do with your money, you need to have an emergency fund in place and you need to find ways to increase your income. Doing all of this is what sets you up to invest with confidence and decreased risk.

Now, once those components are in place and you're completely comfortable, it's time to look at investing and this is where the rabbit hole gets entered. I'm not a financial advisor, I cannot recommend products but I can give you an idea of what I would do:

  1. I'd open a tax-free savings account (didn't exist when I started) - this is absolutely critical, any money earned through interest is tax free (i.e. no capital gains tax). You can save up to R36,000 per year and there is a lifetime limit of R500,000. I'd aggressively save into a tax-free savings account and ensure that I can hit that R500,000 limit as quickly as possible - In other words, I'd invest R36,000 a year every year until I got to R500,000 (13 years or so). Here are the details on the South African Revenue Service website.
  2. If I had any money over and above that R36,000 per year, I'd look at investing in International ETFs. I really like the brokerage called Satrix, I currently invest in their S&P500 ETF and their MSCI World ETF. The S&P500 is the top 500 company's in North America, and the MSCI World ETF invests in companies around the world. I love these two ETFs, I hold both of them and contribute to them every month. This is where that complexity comes into play that I wrote at the beginning of the blog post, this might not be best for you. You might find that a retirement annuity is best for you for tax reasons, I cannot tell you that my two ETFs are better, you need to figure that part out.
  3. One thing I'd definitely do differently is to spend more time researching the fees that brokerages charge, I cannot stress how important this is. Brokerages have advisor fees, platform fees, performance fees, and all sorts of carefully baked-in fees. You really need to take the time to understand this. Even 0.25% can amount to a great deal of money when it's over decades. I wish I'd created a document with the various brokerages along with their funds/ETFs and all the associated fees. I have absolutely zero doubt that this would have saved me a lot of money.
  4. When I started, Facebook and other social media vibes didn't really exist. Sure, there were blogs and there was some great information available on them but absolutely nothing compared to now. The blogs these days have incredible information and there are amazing groups on Facebook or personalities on Twitter that you can follow. I wish this existed when I started, gosh, the amount of time and money I could have saved and made would be ridiculous. Take the time to explore accounts, search on the platforms, follow credible people and absorb what they're sharing. Always be careful of who you follow, make sure they're credible, please. Following someone or entering a group does not mean you need to engage, you can be a fly on the wall reading - remember that, don't be intimidated.
  5. I wasn't the most patient person (I've become better through practice) and was eager to get investing. As I mentioned in point 4, join a group and be a fly on the wall, I'd have spent more time within the financial/investing/saving zone, reading and learning all the terminology. What's an ETF, what's CGT, what's a unit trust, how does compound interest work, what is a brokerage, what is a retirement annuity, and all the other things that come up. Create a document, each time you hear a new term, note it down and write down a description. Keep revisiting this, keep evolving your knowledge and that will make all the difference. I learned all of this along the way, which is fine, but I know I would have made better decisions if I was more in tune with all the options. Think about it, that's like anything in life, if you know what's available or what the options are, you can make better decisions. You don't need to know everything but good foundational knowledge will help and I wish I had done more of that myself.

What's really important to mention is that it's impossible to get this right from day one. If for no other reason things change over time. If you're not interested or capable of managing this yourself, that's absolutely fine and I'd suggest spending time looking for a financial advisor who listens to you, isn't linked to specific brokerages, and shows that they care - let them take you on the journey but do your best to have a meeting once or twice a year where you're updated. But, if you're someone who wants to manage your money, you see the value, and want the ability to control your destiny, please move slowly. You might have a plan in place and you have a child, you might have an emergency that needs attending to, you might have to support a family member, you might lose your job, you might get a better job, there are countless variables at play and things will change along the way so keep track of what you're doing. Don't make hasty decisions and, really importantly, have confidence in yourself. I cannot stress how important self-awareness and self-confidence are when it comes to doing this - I've learned so much about myself through this journey, it's been a wild ride but I wouldn't change it for the world! It's not even nearly over yet, let's go!

Resources:

  1. Follow me on Instagram, Facebook, Twitter, or LinkedIn for daily saving, investing, and money tips.
  2. Podcasts that I binge listen to.
  3. South African ETF cheat sheet.
  4. My expense tracker.
  5. Compound interest inspiration.

Christopher Mills

I run a successful agency, my other passion is personal finance.

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