"Given the many macro and geopolitical uncertainties, market outcomes have become more unpredictable with heightened volatility on the rise," said Mr Eddy Loh, Chief Investment Officer, Maybank Group Wealth Management. "Hence, it is critical to diversify into a range of asset classes with different return correlations to ensure a smoother ride and more stable returns over the long run."

Investors can consider a multi-asset portfolio containing different asset classes such as equities, bonds and cash. The aim is to reap the target returns at lower levels of risk. Here’s how you can build a diversified portfolio.

 

What’s your risk appetite?

As an investor, you need to decide whether to be aggressive or conservative. Your investment goals and time horizon are two important considerations that will impact your approach. For instance, are you saving for retirement or to earn extra income? This will determine the mix of your multi-asset portfolio.

Those looking to generate higher returns typically hold a greater proportion of equities, or stocks. While the potential gains can be more attractive than say, government bonds, such a portfolio is at risk of short-term swings when interest rates increase.

In contrast, those who prefer to play it safe would tilt towards lower-risk investment including bonds or even cash deposits that provides greater stability amid market gyrations.

Besides knowing their risk appetite, investors must also figure out how to optimise their asset allocation to meet their objectives.

 

Pick the right mix

The ideal asset allocation would typically include a mix of stocks, bonds, as well as cash.

"We are also seeing increased investors’ interest in alternative assets which include private investments, hedge funds and gold, for further portfolio diversification," said Mr Loh. "However, they can be less liquid and may be more suitable for sophisticated investors."

On stocks, there are a number of ways to build equity exposure for one’s portfolio. For instance, investors can buy a basket of equities through either mutual funds or exchange traded funds (ETFs). At the same time, they can also select and invest in individual stocks of companies. Fixed Income is another common route to investing. They can be bonds issued by either governments or companies that generate steady coupon payments on regular intervals.

But with the value of stocks and bonds being prone to fluctuations, investors should also hold on to some cash - the most liquid asset - to hedge against adverse market conditions. One thing to note, however, is to avoid the risk of "over-diversification". This refers to owning too many different investments in the same portfolio, to the extent that each incremental investment will reduce the expected returns without meaningfully reducing the risks.

"This could lead to confusion or increased investment costs, add layers of required due diligence and potentially lead to lower risk-adjusted returns," added Mr Loh.

 

Reassess and rebalance

Just like how having the right mix of assets in your portfolio matters, it is just as important to review your investment plan from time to time as your goals may change across your investment time horizon.

For example, when you have significant financial obligations such as paying for a house, you may want to switch to a more defensive portfolio by lowering your equity exposure. Conversely, you will likely be in a better position to take on more risks and invest in more volatile stocks if you already have substantial savings.

To keep up with the market’s ups and downs, investors must also regularly reassess and rebalance their portfolios. Rebalancing essentially means returning the portfolio’s asset allocations to the pre-defined levels of one’s investment plan.

While the frequency of rebalancing a portfolio could differ among investors, it is suggested that you do so at least once a year.  In addition, significant changes in the macroeconomic environment as well as personal circumstances, may warrant ad hoc rebalancing.

"Still, it is important to review but not over-trade as it remains critical for one to adopt a long-term view on investments," said Mr Loh.

To minimise the risks of making emotional decisions, investors must have the discipline to stick to their investment plans. Having a well-diversified portfolio will help them to do so. In addition, it is important to have an appreciation of the risk reward of various asset classes, which lays the foundation for an optimised investment portfolio.