How to build a resilient portfolio through asset class diversification

The start to 2025 saw a notable shift in market conditions, with volatility proving to be the only constant. Recent months serve as a stark reminder of how unpredictable markets can be, particularly in the face of geopolitical tensions, changing monetary policies, and broader macroeconomic developments such as tariffs. In such an environment, asset allocation and diversification are vital tools to help investors navigate market turbulence while aiming to reduce risks and capitalise on emerging opportunities.

Diversification through exposure to various asset classes is essential to grow wealth over time and achieve your financial goals. By understanding the different asset classes and how they interact, investors can build more resilient portfolios throughout the market cycle while working towards their desired outcomes. Diversification across asset classes isn’t merely a technical strategy – it’s a fundamental approach to long-term financial success.

Understanding asset classes

Each asset class offers a unique risk-return profile and responds differently to factors like economic conditions, interest rates, inflation, and geopolitical events.  One of the main purposes of incorporating various asset classes in a portfolio is to enhance diversification. When done correctly, it can reduce overall portfolio volatility and help protect capital across different market conditions.

Asset classes are categories of investments that share similar features and tend to react in comparable ways to economic conditions. The five primary asset classes below each play a distinct role in portfolio construction:

·       Equities represent ownership in a publicly-listed company. When you purchase a share in a listed company on a stock exchange, you become a partial owner, which means that you share in the company’s profits and losses. You can invest in large-cap, mid-cap, and small-cap companies on any listed exchange, such as the Johannesburg Stock Exchange (JSE). The primary role of equities in a portfolio is to provide long-term growth that outpaces inflation. Through equity ownership, you are also able to further diversify across sectors, such as financial services or telecommunications, as well as geographic regions, including South African or international markets.

·       Commodities are assets such as gold, oil, and natural gas, and have prices that are predominantly driven by supply and demand, geopolitical events, and broader macroeconomic trends. Commodities often serve as a hedge against inflation and typically exhibit a low or negative correlation with other asset classes with specific portfolio characteristics.

·       Real estate (property) involves investment in physical property or indirect exposure through real estate investment trusts (or “REITs”), including exposure to residential, commercial, industrial, and infrastructure property. Real estate is generally influenced by interest rates and economic cycles. This asset class has delivered long-term appreciation with relatively stable cash flow, although it remains sensitive to interest rate changes and cyclical downturns.

·       Fixed income (bonds) are debt instruments issued by governments, municipalities, or corporations where investors lend money to the issuer in return for periodic interest payments. Bonds can vary in nature based on their credit quality, for example, investment-grade versus high-yield bonds. From a portfolio perspective, a key metric is duration, which measures a bond’s price sensitivity to changes in interest rates. As a result, it estimates the weighted average time it takes to receive all coupon and principal payments and serves as a proxy for how much a bond’s price will fluctuate when yields change. Bonds tend to have lower volatility than stocks and are often negatively correlated with equities during periods of market stress, making them a key diversifier within a portfolio.

·       Cash and cash equivalents are typically highly liquid, low-risk instruments that are easily tradeable. Of all the asset classes mentioned, they generally offer the lowest returns due to their short-term nature and minimal volatility. This asset class is generally used to provide liquidity and stability during market volatility.

Asset class performance over time

The graphs below offer a clear view of long-term investment trends for local and global assets, measured in rands and US dollars, respectively.

In a nutshell

Diversification across asset classes remains one of the most reliable strategies for successful investing. Each asset class contributes something unique to portfolio construction and wealth creation – from the high growth potential of equities to the income and safety offered by bonds and cash equivalents. Understanding how these assets move about each other assists you in building a portfolio that’s not only positioned for growth but also resilient through market cycles.

Start investing early, diversify wisely, and, through a well-constructed portfolio, allow time and discipline to help you achieve your desired investment goals.

* Berry is the head of sales, PSG Wealth.

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