How to build a diversified portfolio
Diversification is often called the only free lunch in investing. By spreading your money sensibly, you can reduce risk without necessarily giving up return. Here's how to do it in practice.
Why diversification matters
If all your money is in one company and that company stumbles, you feel the full blow. Spread the same money across many investments and a single bad outcome barely dents your portfolio. Diversification won't eliminate risk — nothing does — but it smooths the ride and protects you from catastrophic single-point failures.
Diversify across asset classes
Different types of investment behave differently. The main asset classes are:
- Equities (shares) — the main engine of long-term growth, but more volatile.
- Bonds — generally steadier, providing income and cushioning downturns.
- Cash — safe and liquid, but loses value to inflation over time.
- Property and commodities — can add further diversification and inflation protection.
Your ideal split depends on your goals and how much risk you can handle.
Diversify within each class
Owning shares in one company isn't diversified; owning a broad ETF that holds hundreds of companies is. Go further by spreading across sectors (financials, resources, technology, consumer goods) and regions (South African and global markets), so you aren't overexposed to any single economy.
Match your mix to your time horizon
The longer until you need the money, the more you can lean toward growth assets like equities, because you have time to recover from downturns. As your goal approaches, many investors gradually shift toward steadier assets to protect what they've built.
Rebalance periodically
Over time, winners grow and can dominate your portfolio, quietly increasing your risk. Rebalancing — say once or twice a year — means trimming what's grown too large and topping up what's lagged, returning to your target mix. It's a disciplined way to "sell high and buy low" automatically.
Mistakes to avoid
- Fake diversification — owning five funds that all track the same market isn't diversified.
- Home bias — putting everything into one country's market.
- Over-diversifying — holding so many overlapping products that you just track the market at higher cost.
Use EZvest's portfolio tracker to see your holdings in one place and spot where you're concentrated.