4 Diversification strategies for retail investors

By Lynette Tan

If you’ve only got a minute:

• Traditional diversification strategies include diversifying across and within asset classes
• Other diversification approaches include factor-based approach, thematic investing and using dollar-cost averaging
• While diversification is crucial, over-diversifying can dilute potential returns and make it harder to track performance.

The time-tested strategy of diversification remains one of the most powerful tools in an investor's arsenal. At its core, diversification simply means spreading your investments across different assets to avoid putting all your eggs in one basket.

Diversification matters because it helps protect your money when markets get rocky and keeps your returns steady over time. When some investments are down, others might be doing well, which helps shield your overall savings from big losses.

We'll look at 4 ways to diversify: mixing traditional investments like stocks and bonds, factor-based investing that targets specific return drivers, thematic investing and time-based diversification strategies that account for different market cycles.

Here’s how you can build a diversified portfolio that’s tailored to your goals — and more importantly, one that works in real life.

Foundations of diversification

• Diversification across asset class

The first step is to split your investments among different types of assets with varying risk-return profiles.

Equities (Stocks): These offer growth potential but come with higher volatility.

Bonds: More stable, with regular income. Good for cushioning your portfolio.

Cash & Equivalents: Think savings accounts, T-bills, or money market funds. They offer liquidity and safety.

Alternatives: Real estate (including REITs), gold, or even crypto (for the adventurous). These can hedge against inflation and market downturns.

A traditional approach to diversify across asset class might look like having a portfolio of 60% to equities and 40% to bonds, for example.

• Diversification within asset class

Even within the same asset type, you can diversify to spread your risks.

Equities:

• Geography: Don't only invest in Singapore (e.g. STI ETFs). Add exposure to the US, China, and emerging markets.
• Sectors: Tech, healthcare, finance, consumer staples — each behaves differently depending on the economy and market cycle.
• Market Cap: Mix of large-cap (e.g. Apple), mid-cap, and small-cap companies.

Bonds:

• Blend government bonds (e.g., Singapore Savings Bonds, SGS) with corporate bonds or global bond funds.
• Consider different durations (short-, medium-, and long-term) to manage interest rate risk.

4 Diversification approaches

Building a diversified portfolio goes beyond simply picking different assets. It involves strategically combining various investment approaches.

1. Traditional core portfolio

The foundation of a well-diversified portfolio is a core holding of low-cost Exchange Traded Funds (ETFs) or unit trusts. These track broad market indices like the S&P 500, the Straits Times Index (STI), or global bond indices. This core provides stability, broad diversification, and is generally easy to manage, forming the bedrock of your investment strategy.

2. Factor-based investing

Take your diversification a step further with factor-based investing. This approach targets specific characteristics, or "factors," within asset classes. These factors, including value (undervalued stocks), momentum (stocks on a winning streak), and quality (companies with strong fundamentals), have historically delivered excess returns over the long term.

3. Thematic or Satellite investing

offers an exciting avenue. Allocating a smaller portion of your portfolio (5-15%) to themes like Artificial Intelligence, Renewable Energy, Healthcare Innovation, or ESG (Environmental, Social, Governance) can boost returns and align your investments with your values. However, remember that these thematic investments can be more volatile, so a smaller allocation is recommended to manage risk.

4. Diversify over time

Timing the market is notoriously difficult and often counterproductive. Instead, focus on consistent investing over time through dollar-cost averaging (DCA). This strategy involves investing a fixed amount regularly (e.g., monthly), regardless of market fluctuations. DCA smooths out the impact of market volatility and instils investment discipline. Robo-advisory portfolios like DBS digiPortfolio can automate your DCA strategy, making it even easier to implement.

Review and rebalance regularly

Markets are dynamic, and your portfolio's allocation will drift over time. Establish a regular review schedule (e.g., every 6 months) to assess your portfolio's performance and alignment with your goals and risk appetite. Rebalancing involves selling some outperformers and reinvesting in underperformers to maintain your target asset allocation. This disciplined approach ensures your portfolio stays aligned with your long-term objectives and risk tolerance, maximising your chances of investment success.

Mistakes to avoid

While diversification is crucial, it's possible to overdo it. Over-diversifying by investing in too many funds or stocks can dilute potential returns and make it harder to track performance.

Another common pitfall is chasing past performance, loading up on investments that have recently done well, which is no guarantee of future success. Furthermore, neglecting costs like fund fees or hidden charges can significantly erode returns over time.

Avoiding these common mistakes can significantly enhance the effectiveness of your diversification strategy.

Diversification is not a one-time task — it’s an ongoing process of building, refining, and staying disciplined. Whether you prefer a simple ETF portfolio or want to ride the next big trend, what matters is that you invest consistently and intentionally.

Ready to start?

Need help selecting an investment? Try ‘Make Your Money Work Harder’ on digibank to receive specific investment picks based on your objectives, risk profile and preferences.

Invest with DBS  Invest with POSB

Speak to the Wealth Planning Manager today for a financial health check and how you can better plan your finances.

Let's Meet

Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

Disclaimer for Investment and Life Insurance Products