Do you ever think about ejecting the part of your portfolio that is not doing well? By cutting your losses you could reinvest the proceeds back into what is doing well and your portfolio would look healthier. That may not be the best action to take.

The fact parts of your portfolio are laggards could be a sign you have a healthy mix of uncorrelated assets. Yes, it can also mean you have made bad investment decisions, yet it can signal proper diversification which is a good thing.

You want investments to deliver at separate times so there is always something in your portfolio helping with the pursuit to grow your wealth.

Investors often lack diversification, even if they think they already have it. A classic mistake is to put all your money into stocks or funds that are driven by the same factors. For example, someone might have two actively managed global funds, shares in Apple (AAPL:NASDAQ) and Microsoft (MSFT:NASDAQ), and a couple of technology-themed investment trusts and tracker funds. There is a high chance that Apple and Microsoft feature in all the global and tech funds, and that there is considerable crossover elsewhere.

‘The common mistake is to think you are diversifying by owning a number of different assets when they are all highly correlated to each other and deliver at the same time. You are actually kidding yourself that you are diversifying – it’s fake diversification,’ says Barry Norris, head of Argonaut Capital.

‘This is a problem because people who think they are diversifying by owning different names actually just end up in the same bull market rodeo when all of those stocks will only perform under certain macroeconomic circumstances, such as all being highly correlated to low interest rates or perceptions of growth in the tech world.

‘That crowding often happens when you’ve had a long bull market and people think they can diversify by owning 10 tech stocks rather than one, but that is the complete opposite of diversification,’ adds Norris.

To fix the problem, one approach is to spread your money across a range of industry sectors, geographies and asset classes. That means looking beyond equities at areas such as bonds, property, gold, infrastructure and cash. They may be less glamourous than equities but history suggests they can provide ballast to a portfolio over the long term.

Last year we saw the rare phenomenon of bonds falling in unison with equities, with property and infrastructure also having a challenging time. Cash certainly benefited from rising interest rates but these other asset classes did not.

I take the view that 2022 was a highly unusual year with markets having to rapidly adjust to a much different landscape, with interest rates shooting from rock bottom to a more normalised level and the rapid pace of change caused a shock to the system. This is still playing out, hence why assets like infrastructure are currently struggling, but hopefully the worst is past us.

Look back across longer periods and you will see that bonds have functioned as a cushion when equities struggle, likewise gold, property and cash have also had their moments in the sun. It seems logical to suggest these trends will eventually return.

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