What Is a Granular Portfolio?
Let me explain what a granular portfolio is—it's an investment portfolio that's well diversified across a wide variety of assets, usually with a significant number of holdings. You see, because this type of portfolio has a large number of positions in different asset classes and sectors, it ends up with a lower overall risk profile. On the flip side, if your portfolio has low granularity, meaning fewer positions or assets that are highly correlated, it's less diversified and carries a higher risk.
How a Granular Portfolio Works
You can apply the concept of a granular portfolio to credit, currency, equity, bond, or even mixed asset class setups. When it's highly granular—sometimes called infinitely granular—it diversifies away most of the unsystematic risk, which is the risk tied to individual securities, so you're mainly left with systemic risk that diversification can't touch.
Advantages of a Granular Portfolio
The primary advantage for you as an investor is the reduction of risk, but there are others like the ability to customize your portfolio and diversify across many asset classes. Let's break this down.
Reduces Risk
By spreading your investments across many sectors and asset classes, a granular portfolio helps cut down on overall risk. For instance, if healthcare stocks are tanking, your exposure to technology, financials, and consumer goods can offset that. You could even add bonds to provide income during times when stocks are stuck in a range.
Customization
Since granular portfolios include many holdings, you can easily adjust them to fit your financial objectives. Say you're young—you might allocate 90% to equities, 5% to bonds, and 5% to cash. As you near retirement, shift it to something more conservative without much hassle.
Asset Choice
A granular portfolio gives you the flexibility to diversify across multiple asset classes however you want. If precious metals like gold and silver are on the rise, you could add some futures contracts to capture that movement.
Disadvantages of a Granular Portfolio
There aren't many disadvantages to a granular portfolio, but the ones that exist can be significant, especially in unstable markets or downturns.
Windfall Gains
The diversified nature means a huge gain in one investment won't move the needle much on your overall returns. If a stock jumps 75% but it's only 5% of your portfolio, you'll see just a small bump.
Exposure
In stable times, uncorrelated assets and sectors offset each other to reduce risk, but in a crisis, those correlations can break down and actually increase your risk. Take the 2008-2009 financial crisis—equities and commodities became strongly correlated, while bonds and equities decoupled. You need to monitor changing correlations between asset classes to avoid overexposure. Understanding how market correlation and volatility interact is key to managing your portfolio risk.
Key Takeaways
- A granular portfolio has investments across many asset classes and sectors.
- The primary advantage is reducing risk through diversification.
- Other advantages include customizing holdings to meet financial objectives and flexibility across asset classes.
- Disadvantages involve missing out on big gains and potential increased risk in volatile markets.
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