This is our third article about how to preserve your wealth in these difficult days: last week, we looked at how important it is to have a proper wealth review done. This week it’s all about the importance of diversifying your investments.

Not having a diversified portfolio, many commentators believe, is one of the reasons why so many Irish people are now in financial difficulty: they simply put too much of their income, savings and debt into the purchase of property or Irish shares.

Mark Westlake, the head of wealth management at Gold and Silver Investments in Dublin, who I interviewed for this column recently, said that far too many new clients have “as much as half their wealth tied up in property” here at home and abroad, most of it, heavily leveraged, that is, mortgaged.

Meanwhile, says Mr Westlake, “the average Irish managed fund has about 17 per cent of its 65 per cent plus equity holdings [shares] in Irish shares. Given that the Irish market represents less than 1% of global equities, and is dominated by Irish banking and construction shares, this is very overweight.” It also explains, he says, why Irish pension funds in particular are down nearly 20 per cent this year.

But what exactly does diversification mean and what should you be investing in to match that definition?

According to Warren Buffett, the legendary investment manager and the world’s richest man, “extreme diversification is what 99 per cent of the population should seek”.

Buffett concentrates on a small selection of company shares for his massive Berkshire Hathaway fund, but he is exceptional: ordinary people, with no expertise in finance he says should buy low cost indexed funds or ETFs (exchange traded funds representing a basket of shares that trade on stock exchanges like a single share.)

Index funds will produce a return commensurate with the performance of their index, minus costs and charges which should be no more than the stockbroking commission and circa 0.5 per cent of the fund value per annum.

Not only do you spread your risk among, say the 100 companies in the FTSE-100 if you bought that index, but if you buy several different index funds or ETFs that represent other geographical areas, industries or commodities, (like oil and gas, iron and copper, precious metals, wheat and corn, water resources), you are further spreading your risk.

The other reason why Warren Buffett and others suggest index or ETF funds is that study after study shows that over the long term say 20-year returns from passively managed index/ETF funds beat the returns produced by actively managed ones in about 80 per cent of the time.

This is because of the high management costs that are charged regardless of which direction the markets move); only exceptional fund managers and their teams can keep winning streaks going longer than a few years.

Most of us, if we have any investment funds, own them as part of a pension. The vast majority of pensions, because regulations require the use of life assurance structures, are mixed, actively managed funds that aim for diversification in shares (equities), bonds, cash and property.

Unfortunately, say their critics, these funds are too heavily weighted right now in Irish and developed economy shares and the charges are too high.

Given how globalised our world is now, the best advisors are coming round to believing that funds need to shift a larger proportion of assets away from United States, Europe and Japan.

Instead, the believe that assets should be moved to include low cost indexed funds that include the BRIC countries (Brazil, Russia, India and China) and other industrialised, developing countries in South East Asia, South America and even in Africa.

Given the global demand for commodities, especially oil, gas, foodstuffs and water these also need a bigger place in your portfolio.

And in the case of retirement funds, there should be a higher proportion of fixed interest funds, like bonds. (see for an example of a diversified group of assets).

If you are investing outside a pension fund, a good place to start building a collection of low cost, diversified index funds through companies like and by studying a site like or

You should then buy the ETFs of your choice using a low cost on-line stockbroking service; NIB bank customers can access one directly from their on-line current account.

Lower cost actively managed funds if that is what you prefer – are available from some of the world’s biggest fund managers; a good place to check them out is

Once you establish what proportion of different assets you should have for your particular circumstance and this is where a financial advisor could help the internet is your greatest source of information and marketplace.

Not only can you find index funds, ETFs and managed funds there, you can comparison shop the costs and charges between them.

Next week, as the last part of this investment review series, we ask Mark Westlake of Gold and Silver Investments and Eddie Hobbs of FDM what type of index and ETF funds we should consider including in a well-diversified portfolio.