Investors worldwide are navigating a period of heightened volatility, much triggered by geopolitical developments such as the US’s imposition of trade tariffs under President Trump and the retaliatory measures from major economies like China. For South Africans, the turbulence is intensified by domestic political instability, particularly the recent fallout within the Government of National Unity following the DA’s decision not to back the ANC’s proposed budget. But the unease runs deeper than short-term market corrections. It raises fundamental questions about the long-term sustainability of our country, and such uncertainty often drives emotional, short-sighted investment behaviour. In volatile times like these, the most prudent approach remains a well-diversified portfolio with balanced exposure across local and global assets. We are often led to believe that “this time is different”, yet history consistently shows us that cycles repeat, and investor pitfalls remain the same. South African investors, in particular, face a recurring challenge: concentration risk. Whether through overexposure to certain asset classes, sectors, or currencies, this lack of diversification can magnify the effects of both sharp downturns and long-term economic decline.
Concentration risk refers to the potential for significant loss arising from overexposure to a single investment, sector, or geographic region. In essence, it is the inverse of diversification, which involves spreading investments across various asset classes and regions to mitigate risk. A concentrated portfolio, by contrast, carries disproportionate exposure to one area, leaving the investor vulnerable to sector-specific or regional downturns. Several behavioural drivers can lead to this risk. At times, it’s the result of popular investment trends. Think of the property boom of the early 2000s, the more recent rush into cryptocurrencies, or reactionary moves to externalise capital during periods of heightened political fear. In other cases, investors may gravitate toward the familiar: assets linked to their profession, hobbies, or local markets. Regardless of the motivation, the risk is the same: An unbalanced portfolio can leave you exposed when markets shift.
Let’s take a closer look at one example that has affected many South African investors in recent decades: residential property. In the early 2000s, declining interest rates, coupled with the popularity of books like Rich Dad Poor Dad by Robert Kiyosaki, fuelled a widespread belief that property was the easiest path to wealth creation. The ability to leverage debt, borrowing to buy a property and using rental income to cover the bond seemed like a foolproof strategy. But fast forward 20 years, and the picture looks very different. Outside of the Western Cape, property prices in many provinces have stagnated, weighed down by poor service delivery, rising municipal rates and taxes, and persistent crime. Investors who concentrated their retirement strategy in this space have often seen returns that failed to keep pace with inflation. Selling in the current environment can also prove difficult without significant price cuts. While property itself is not inherently a poor investment, overexposure to a single location or sub-sector can carry severe consequences, clearly illustrating the dangers of regional and sector-specific concentration risk.
Another common form of concentration risk arises when an individual’s wealth is tied almost entirely to their own business. While it is true that investing in your own enterprise often yields the highest returns, particularly given your direct control and intimate knowledge of the business, this approach carries significant risks. Business owners frequently estimate future retirement wealth based on modest growth projections of 10 to 15 percent per year, leading to seemingly impressive valuations. However, this value is only realised if the business can be successfully sold, which is often much easier said than done. Numerous factors can erode or delay that value realisation, including increased competition, shifting market demand, regulatory changes, or even a personal health crisis. Add to that the difficulty of finding a suitable buyer with both the interest and the capital to acquire the business, and the risk becomes clear. Relying solely on your business for retirement capital can leave you vulnerable to a range of uncontrollable events, again highlighting the importance of diversification, even for entrepreneurs.
A final example that affects many investors is the geographic allocation of their portfolios, whether through having the majority of their assets in their country of residence or, on the other hand, allocating too much offshore. In both previous examples, we saw how investors can also become significantly exposed to geographic concentration risk. It is important to recognise that South Africa is a small and vulnerable developing economy. Even when we make all the right investment decisions, events beyond our control, such as a global pandemic or international trade disputes, can have a devastating impact on local markets. Having a reasonable portion of your portfolio invested globally can provide valuable protection against a rapidly weakening rand. At the same time, one should also avoid excessive exposure to offshore assets, as these tend to be more volatile due to currency fluctuations. After President Mandela’s term ended, many investors were persuaded to externalise all their assets, fearing that South Africa would decline. Yet, the opposite occurred. The country entered a period of strong economic growth, the rand appreciated, and local equity and property markets reached record highs. Meanwhile, global markets took almost a decade to recover. The key takeaway is that geographic diversification must be carefully balanced and guided by sound principles, not fear or speculation.
In conclusion, many investors are unknowingly exposed to concentration risk. A meaningful outcome would be for readers to recognise this risk and take proactive steps to address it through greater diversification. The solution is often not a dramatic switch but rather a series of intentional, incremental changes that gradually optimise the portfolio. For property owners, this might involve selling one or two properties and externalising a portion of the proceeds. For business owners, it could mean allocating part of their cash flow to other investment vehicles. For those with a heavy bias toward local assets, it may be time to start building a well-considered offshore portfolio. Every investor’s situation is unique, and seeking the guidance of a qualified financial planner can make a significant difference in navigating these decisions with clarity and confidence.
Theoniel McDonald, CFP®, holds an MBA, and serves as Head of Financial Planning at Carmel Wealth, Senior Advisor at Wealth Associates, and a Director of the FIA. Connect with him at theoniel@wealthassociates.co.za or LinkedIn.
