The one chart that shows why diversifying your investments is so important

As an investor, you’ve likely come across the term “diversification” before. You may have even adopted the philosophy of diversification in your portfolio, and it’s a principle at the core of our investment strategy at Black Swan Europe.

A diversified investment portfolio doesn’t focus on any particular asset, industry, or geographical location – instead, capital is spread over a wide range of investment types across these categories. The major benefit of a diversified portfolio is in risk reduction – more detail on the mechanism behind this later.

In JP Morgan’s February 2024 market review, they shared a graphic which neatly shows the benefits of geographical diversification. We mention other forms of diversification later.

Read on to see this chart, and to learn more about the importance of diversifying your portfolio by region, as well as asset type.

Investing in just a few assets can be a dangerous approach

Investing all of your money in one asset means negative performance could see you lose some or all of your investment.

For example, if you were to invest €100,000 in one company and their share price fell by 10%, the value of your investment would fall by €10,000. However, if you’d instead invested your €100,000 across the US’s top 100 companies, any losses in that company’s share price might be offset by gains elsewhere.

Diversifying by investing in a range of geographical regions could also reduce the risk of one investment bringing down the value of your entire portfolio.

If one region in your portfolio doesn’t perform well, diversification means that gains in other regions could help your portfolio to generate positive returns – or to minimise losses.

The below chart from JP Morgan illustrates the dangers of not diversifying your portfolio geographically. It shows the performance of six global stock market indices since 2013.

Source: JP Morgan

As you can see, over time, each market saw periods of high, low and even negative growth. There’s no one specific region that consistently outperforms the others – for example, the UK was the worst-performing market in 2020 but the best-performing in 2022, and Japan went from the worst in 2019 to the best in 2023.

By holding investments across geographies, you could avoid your portfolio swinging between extremes of strong and weak returns.

Take the MSCI Europe ex UK Index in the above graphic as another example. This index captures large- and mid-cap representation across 14 countries in Europe. In 2013, 2017, 2019, 2021 and 2023 the index performed well with growth above 10%, but in 2018 and 2022 the index saw negative growth.

If all your wealth was invested in Europe, in 2018 and 2022 you would have seen the value of your portfolio fall substantially. However, if you were also invested in other regions in these years, some of those losses could have been mitigated.

Even in years such as 2016 and 2020 when the MSCI Europe ex UK Index received positive but minimal growth, your returns would have been boosted if you’d also held investments in Japan and the MSCI EM – an emerging markets index.

Diversification can come in several forms

You’ve read how geographical diversification can benefit your average investment returns, but you can also diversify your investment portfolio by types of assets, by different components with asset types, and by currency, for example. At Black Swan Europe, we typically take all of these into account.

Ultimately the right approach is specific to your situation, and your goals.

Get in touch

If you are curious about how diversification could benefit your investment portfolio, do get in touch. Please contact us at info@blackswancapital.eu to find out how we can help you build a diversified portfolio, designed to help you achieve your objectives.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.