A positive one-year return from an ASX share portfolio would have been a rare sighting at the end of 2022.
There's no disguising the brutality of markets last year. The culmination of inflation, war, and interest rate rises dealt a devastating blow to the wealth of many investors.
Following a rubber band rebound from the depths of the COVID-19 crash in 2020, scores of investors were caught on the back foot as the landscape began to shift and monetary policy started to tighten. The portfolios that suffered the most were those concentrated in ASX tech shares — my own personal share portfolio included.
Here's one step I'm taking to avoid the same pain twice.
Image source: Getty Images
Find value in a variety of places
Where someone chooses to invest is ultimately a personal decision. But, it is worth keeping in mind that great companies can come from all areas of the market — not just tech, or just healthcare, or just 'insert your favourite sector'.
I'll admit, as a young investor, I had become heavily invested in the tech sector — both ASX and US shares. Heading into 2022, roughly 56% of my personal portfolio value was stashed in tech companies. Another 17% or so was tied up in consumer discretionary shares.
That adds up to nearly three-quarters of my own stock picks contained in two sectors that aren't particularly well-known for their defensive attributes. While I'm personally reasonably risk-tolerant, the volatility throughout 2022 was a little too stomach-churning for my tastes.
The solution? Diversification.
Not every sector had a shockingly poor time last year. As you can see above, ASX energy shares chalked up a 30.8% return — almost 61% better than the S&P/ASX 200 Info Tech Index (ASX: XIJ). A few energy holdings would have gone a long way in reducing the overall volatility in the share portfolio.
It can be a fine balance. Buying individual companies and remaining diversified demands a broader circle of competence. However, deep and narrow knowledge can sometimes be an investor's greatest edge in a specific industry.
So, what's the alternative?
Easy diversification inside an ASX share portfolio
Another way to bring greater diversity to a portfolio is by making use of exchange-traded funds (ETFs).
Today, there are endless options for investors, ranging from ETFs for specific sectors, thematics, geographies, etc.
An ETF allows people to invest in a diversified fund in a single transaction. This can be extremely helpful if you hold a special interest in one area of the market, but still want some level of sector diversification.
