Can you still diversify an investment portfolio, in this modern age of monopolistic competition?
Absolutely! Even in today’s age of monopolistic competition, where a few major players dominate many industries, own much of the larger stocks and companies, diversifying an investment portfolio remains important and possible. Here are four thoughts and principles on the topic:
Global or Geographic Diversification: While some sectors may be dominated by a few large companies, we can still diversify by investing globally.
Different economies and markets grow at different rates, and geopolitical events can create opportunities in regions outside the dominant, well publicised ones. This has been proven over the past 5 years, during major world events that in my view have provided some of the more “fat/ Bull market” years in our investment returns. We have seen major ups and downs and still find value in our investment models.
Asset Class Diversification: Monopolistic competition affects individual companies and nations, but we can still spread risk across different asset classes, such as stocks, bonds, listed real estate, commodities, and even alternative assets that may be riskier, these may include cryptocurrencies or private equity and property. We always consider asset class correlation, which measures how the prices of different asset types move in relation to each other.
Focus on Niche Markets: Even in sectors with monopolistic competition, niche markets and smaller players often thrive. Investing in emerging or under-the-radar markets, sectors or companies could provide a counterbalance to the bigger players.
Technological Disruption and Innovation: New technologies and disruptive companies continue to emerge, challenging even the biggest players. Think the recent Chinese AI disruption. Investing in innovation—such as AI, renewable energy, and biotech—can provide diversification outside traditional monopolistic sectors, potentially reducing risk and enhancing returns. Although, some of these rising markets have much volatility, unpredictability and it may be difficult to identify true value.
Despite monopolistic competition, diversification strategies can still help balance risk and increase the potential for returns over the long term. At RWM we take a fundamental approach. Powerful research is behind each decision we hold, and we understand what drives each investment we analyse.
Our Investment Management partners: Morningstar-
Amy C. Arnott, CFA
Mar 20, 2024: “Diversification is a core principle of sound investing. A portfolio that includes assets with different performance characteristics often leads to better risk-adjusted returns than one that relies on a single asset class. But building a diversified portfolio can be easier in theory than practice.
In our recently published 2024 Diversification Landscape report, my colleagues Christine Benz, Karen Zaya, and I took a deep dive into the diversification potential of several major asset classes. Here are some of the key lessons from our research that investors can apply to improve their portfolios”
Article Reference: https://www.morningstar.com/portfolios/top-10-things-know-about-building-diversified-portfolio
