A big mistake South African investors make

While diversification is key to reducing investment risk and enhancing long-term returns, experts stress that it must be done thoughtfully.

PSG Wealth’s head of securities, Wendy Myers, said that even though diversification is one of the most talked-about principles in investing, it is one of the most poorly executed in practice.

“At its core, diversification is about reducing risk without sacrificing return,” Myers said. “It’s one of the few free lunches in investing, but that doesn’t mean it’s as simple as owning a bit of everything and hoping for the best.”

According to Myers, diversification is about owning the right mix, for the right reasons, at the right time. She explained that before diversifying, investors need to understand their risk profile.

“Are you risk-averse and inclined towards stability? Or are you in a position – due to age or financial circumstances – to stomach more volatility in pursuit of higher returns?”

Younger investors are particularly well-placed to invest more heavily in equities. They have time on their side to recover from market dips and benefit from long-term compounding.

“But that doesn’t mean blindly investing in every available asset. Diversification should still be thoughtful and deliberate,” she said.

Deciding whether to invest locally or offshore is another important aspect of diversification. Myers recommended a 60% local, 40% offshore asset split as a good starting point.

“This gives you access to South Africa’s potential for recovery and growth while also benefiting from global themes and currency exposure,” she said.

“It’s important, however, to be comfortable with both sides of that equation. Dollar gains are great, for example, until a strengthening rand or a correction in United States markets cuts into your returns.”

Sector diversification is also critical. Different sectors, including technology, commodities, and financials, all move differently through the broader economic cycle.

“Gold, for example, has done well recently. Financials continue to offer strong fundamentals. And the global technology sector remains compelling, especially those companies leading the AI revolution,” she said.

“That said, diversifying across sectors doesn’t mean investing in everything. You don’t need exposure to every theme to build a well-rounded portfolio.”

Myers suggested that investors should select a few key sectors they understand and believe in, then focus on quality companies within those sectors.

“As a rule of thumb, 20 to 25 shares are more than sufficient to achieve meaningful diversification. Anything beyond that tends to dilute your returns and reduce clarity in your portfolio,” she explained.

“As Warren Buffett puts it, wide diversification is only required when investors don’t know what they’re doing.”

ETFs and unit trusts

When it comes to shares, ETFs and unit trusts, Myers said there is no one-size-fits-all answer. All of these have a place in a well-structured portfolio.

“For investors who prefer a lower-volatility approach and don’t want to manage individual positions, unit trusts and ETFs offer an easy entry point,” she said.

“Certain index-tracking ETFs can be especially useful for gaining broad exposure to offshore themes or entire markets. Remember, however, to account for fees as you’ll be paying a management fee to the issuer of the ETF.”

On the other hand, individual shares offer the advantage of direct control over investment decisions – including what to buy and when to sell.

“There’s also the potential to outperform passive instruments, especially in local markets, where active managers have a better track record over shorter timeframes,” she said.

“Just be aware of the risks involved. A poorly chosen stock can lead to substantial losses – as much as 80%. So do your research, be selective, and ensure that your portfolio has a balanced mix of stable and high-growth assets.”

Myers explained that there are plenty of excellent opportunities for investors to diversify their portfolios at the moment.

“We’re in an interesting time globally. With interest rate cuts on the horizon and geopolitical uncertainty on the rise, there’s renewed investor interest in emerging markets – South Africa included,” she said.

Local equities have delivered strong returns in 2025, and there is optimism about improved local growth prospects through the rest of the year.

“The offshore technology sector – particularly e-commerce and AI – continues to present long-term investment appeal, despite recent pullbacks in stocks like NVIDIA,” she said.

“Companies such as Alphabet, Amazon and Microsoft have invested heavily to accelerate their AI capabilities. For investors seeking long-term growth, maintaining exposure to these innovation leaders remains a compelling strategy.”