What is a granular portfolio?
A granular portfolio is a well-diversified investment portfolio with several holdings across many assets. This portfolio has a lower overall risk profile due to its diverse composition of investments across asset classes and industries. Conversely, “low granularity” portfolios include fewer positions or strongly linked assets. They are less diversified and have a more significant risk profile.
How Granular Portfolios Work
Granular portfolios might be credit, currency, stock, bond, or hybrid asset classes. Infinitely granular portfolios eliminate unsystematic risk due to diversification, leaving investors vulnerable to systemic risk, which diversification cannot reduce.
Granular Portfolio Benefits
A granular portfolio allows investors to personalize and diversify across numerous asset types, but its primary benefit is risk reduction.
Reduces Risk
Diversifying assets across industries and asset classes lowers portfolio risk. A diversified portfolio can compensate for weak healthcare firms by including technology, financials, and consumer goods. When stocks are range-bound, granular portfolios might add bonds for income.
Customization
It’s easy to tailor granular portfolios to individual investors’ financial goals since they include numerous holdings. For example, an investor may have asset allocations of shares, bonds, and cash. Young investors may invest 90% in stocks, 5% in bonds, and 5% in cash. As retirement approaches, investors may readily modify their allocations to be more cautious.
Choice of Assets
A granular portfolio lets investors diversify across asset groups. If precious metals like gold and silver rise, investors can add futures contracts to their portfolios for exposure.
Bad Things About Granular Portfolios
Granular portfolios have fewer drawbacks but can be considerable, especially during market downturns.
Windfall Profits
Due to its diversification, a significant investment gain has little influence on total returns in a granular portfolio. A 75% rise in a stock in an investor’s portfolio may only be considered a minor gain if it only accounts for 5% of its value.
Exposure
Granular portfolios lower risk by offsetting uncorrelated asset classes and sectors in stable economies. In a financial crisis, these relationships may break down and raise risk.
Stocks and commodities became heavily linked during the 2008–2009 global financial crisis, whereas bonds and stocks became uncorrelated. Investors with a granular portfolio should watch shifting correlations between asset types to avoid overexposure. Understanding market correlation and volatility can aid investors in managing portfolio risk.
Conclusion
- Granular portfolios invest in multiple asset types and sectors.
- The main benefit of a granular portfolio is risk reduction through diversification.
- The option to diversify across asset classes and personalize a portfolio to match financial goals provides further benefits.
- A granular portfolio may lose windfall gains and increase risk during market volatility.
