Diversification premium is an investment cure for coronavirus

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Fleeing from risky assets in times of stress may be counterproductive in the long run, writes Adrian Saville

A woman wearing a protective face mask looks at an electronic quotation board in Bangkok, Thailand, February 29 2020. Picture: ROMEO GACAD / AFP

Global supply chains are also experiencing the effects as Chinese factories remain closed, leading Jaguar Land Rover to warn that its UK-based factories could run out of car parts, and Apple to warn of possible iPhone shortages. Rather than simply “buy the dips” or “sell based on strict stop-loss limits”, evidence suggests that a more nuanced approach is needed for successful risk management. The investment tool that immediately presents itself here is powerful, elegant and available to all investors: diversification.

But selling everything “risky” in times of stress to crowd into a “safe asset” such as cash or treasuries may not be as rational as it first seems — especially if the investment timeline is long. Imagine you find a stable, single asset investment that will provide a guaranteed 5% per annum over the next 25 years. If you invested R500,000 today, it would be worth nearly R1.7m at the end of the term.

 

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