Weathering the Storm: How Diversification Protects Investors

A recent email from a Fund Manager reminded me about the importance of diversification. Whether it’s a natural event such as a Fire In Los Angeles, a Cyclone in Far North Queensland or Donald Trump introducing Tariffs, the recent Fire Storms in the US highlights the benefits of diversification. In January 2025, Los Angeles was once again thrust into the global spotlight, but for all the wrong reasons. A series of devastating wildfires swept across the city’s outer regions, destroying homes, displacing thousands, and leaving a trail of economic disruption. While the human impact was immeasurable, investors with diversified portfolios saw firsthand how strategic allocation can mitigate financial risk in times of crisis.

For those having any exposure to Global Property,  the fires posed an immediate question—how would this disaster impact real estate holdings in Los Angeles? The answer, much to the relief of investors, was reassuring. One Manager, that emailed me their exposure, reported despite the widespread destruction, the Portfolio’s exposure to the broader Los Angeles market was limited to approximately 5%, spanning multiple real estate sectors including residential, office, self-storage, industrial, and healthcare. More importantly, less than 2% of its holdings were located in wildfire-affected areas, ensuring that the direct financial impact remained minimal.   A typical investor with a well-diversified portfolio spread across local and overseas shares, property and bonds and cash means it was a very small exposure overall.

The Strength of Diversification

Diversification, often likened to not putting all one’s eggs in a single basket, is a fundamental principle of sound investing. The email from an Investment Manager was  timely reminder for me and the Los Angeles wildfires serve as a real-world example of how a well-diversified portfolio can withstand localized economic shocks. The Portfolio’s geographical and sectoral spread meant that while certain properties faced risk, the overall financial health of the investment remained intact.

Real estate investment trusts (REITs), particularly those with global exposure, offer resilience against region-specific calamities. In this case, the Portfolio’s holdings extended far beyond Los Angeles, with investments in stable markets across the U.S., Europe, and Asia. This diversification ensured that a localized event did not disproportionately impact overall returns.

Lessons for Investors

The fires underscored the importance of diversification not just within a real estate portfolio, but across all asset classes. Whether investing in equities, bonds, property, or alternative assets, spreading risk reduces vulnerability to unforeseen events. Natural disasters, economic downturns, and political and geopolitical instability are all unpredictable, but a thoughtfully diversified portfolio provides stability amidst uncertainty.

While the rebuilding process in Los Angeles will take time, investors can take solace in knowing that strategic planning and diversification continue to be the best defence against market volatility. The ability to weather financial storms—just as communities rally to recover from natural ones—highlights the enduring value of a well-structured investment approach.