Why portfolio diversification is key to combating investment headwinds

From tariffs to rate changes, plenty of factors are set to impact portfolios in the months ahead. So how can investors holding shares, bonds, gold or crypto prepare?

Volatility is part and parcel of investing. It comes with the territory. That's why investors with longer horizons are often reminded to take market turbulence and short-term ups and downs in their stride.

That can be easier said than done, especially during periods of volatility - like in recent weeks - where markets and asset prices have seesawed.

A little bit of knowledge isn't a bad thing in uncertain times. So with that in mind, what are the factors currently impacting investment portfolios? And what action might investors consider taking?

We put those questions to four experts to get their thoughts on everything from tariff changes to interest rate movements and how they could affect shares, bonds, gold and cryptocurrency.

Australian shares

Despite some bumps in the road along the way it's been a broadly positive start to the year for Australian shares, with the both the S&P/ASX 200 index and the All Ordinaries index up more than 4% since the beginning of January.

David Harvie, the head of sales at Saxo Australia, says that there are a few factors that are likely to shape local markets and share prices in the near future though.

"Interest rates remain a critical focus. The Reserve Bank of Australia's previous rate hikes have created a challenging environment for consumers and businesses alike.

"While potential rate cuts could provide some relief, the lagged effects of past increases are likely to continue weighing on economic growth.

"The banking sector, particularly Commonwealth Bank, has shown resilience. Meanwhile, the tech sector is benefiting from the global artificial intelligence boom, although it's important to remember that Australia's tech weighting is smaller compared to the United States.

Speaking of weighting, Harvie suggests that diversification should be on the minds of investors at the moment when it comes to Australian shares at the moment.

"Diversification remains key, as relying solely on domestic stocks, particularly in mining, can expose investors to significant risks."

International shares

Like local markets, international markets have experienced some jittery moments in the early stages of 2025. However, many of the major indices have trended higher.

Looking forward though, it's no surprise that the policies of the new Trump administration will have a substantial influence on markets in the United States and beyond. As Harvie notes, there may be both risks and opportunities ahead.

"Investors should brace for volatility as markets react to new tariffs and potential disruptions in supply chains, particularly affecting tech and small-cap sectors," he says.

"Deregulation under the Trump administration could benefit industries like energy and financial services. Reduced compliance costs could drive efficiency and profitability in these sectors.

"However, tighter immigration policies may strain industries dependent on foreign labour, such as technology and healthcare, potentially pushing wages higher and fuelling inflation."

More broadly, Harvie believes that the push for greater sovereign capability in many countries around the world is also likely to be a significant theme this year.

"Initiatives like the CHIPS Act in the US are driving investments in domestic semiconductor manufacturing, aiming to reduce reliance on foreign supply chains. This trend is mirrored globally, with countries enhancing their technological and industrial self-sufficiency."

So is there anything that investors with an exposure to international shares could be thinking about at the moment? Again, Harvie says that a diverse portfolio is important.

"Diversification is not just a strategy; it's a necessity. Investors should spread their exposure across sectors and geographies to mitigate risks. Staying invested with a long-term focus is crucial, as market timing can be perilous.

"To that end, tactical opportunities exist in sectors benefiting from infrastructure spending and reshoring activities. Industrials and energy sectors in the US are poised for growth beyond the tech-heavy 'Mag 7' stocks. Additionally, European equities offer compelling value opportunities."

Fixed income

In the world of bonds and fixed income, interest rates continue to be a major factor, says Gaby Rosenberg, the co-founder of fixed income investing app Blossom.

"Inflation remains a pivotal concern, with US inflation proving stickier than anticipated. The market has now adjusted its expectations, pricing in only two rate cuts for 2025, down from four last year.

"Closer to home, Australian markets are pricing in the first RBA rate cut as early as February. However, if inflation data does not decline as expected, there could be repricing and volatility, with rate cuts potentially being pushed further into the future."

Given the recent turbulence in other asset classes - and the potential for more on the horizon - Rosenberg suggests that investors shouldn't forget the potential benefits that an allocation of fixed income can have in a portfolio.

"Fixed income has enjoyed an attractive period over the past few years, benefiting from higher yields. However, its role in a portfolio extends beyond just returns-it's about balance and stability.

"Markets have been highly volatile over the past 6-12 months. While equities are performing well now, it's uncertain how long that will last.

"Diversification is key-it's never advisable to put all your eggs in one basket. Fixed income serves as a counterbalance to riskier assets, helping investors manage portfolio risk."

Gold

After a stellar few years gold has enjoyed a positive start to 2025, with the precious metal hitting a record US$2874 per ounce ($4590 per ounce) this week.

Robin Tsui, APAC gold strategist at State Street Global Advisors, believes that gold prices could climb as high as US$3100 per ounce ($4930 per ounce) as the year progresses, for three key reasons.

"Strong central bank purchases of gold are expected to continue unabated, helping to offset any negative impact a strong US dollar might have on price," he says.

"Consumer demand in China and India is also growing as local gold mutual funds and ETFs proliferate and regulations encourage gold ownership in Asia.

"Then monetary easing in the US, and the potential for the new Trump administration's fiscal policies to raise deficits, implement more tariffs and stoke inflation, should encourage more demand in gold."

Broadly speaking, investors might not want to go overboard with their allocation though. Tsui notes that State Street typically recommends that gold comprises 2-5% of a portfolio.

"A strategic allocation will allow investors to take advantage of gold's role as diversifier due to its historical low correlation with stocks and bonds," he says.

"Multi-asset portfolios will benefit from having gold complement the downside hedging exposures from fixed income and other real asset allocations."

Cryptocurrency

Of all the asset classes, cryptocurrency is perhaps most associated with volatility. And that's certainly been on show in the first five weeks of 2025, with substantial Bitcoin price swings and a large drop in the price of Ethereum.

Like other assets, the Trump administration seems to be having a significant influence. Caroline Bowler, chief executive of exchange BTC Markets, says that it's clear that crypto markets are finely attuned to Trump's declarations.

"The immediate theme is Trump's embrace of crypto and digital assets. The administration is staffed by pro-crypto businesspeople who have been clear on their agenda.

"Most recently, there was the announcement of a digital asset working group across both executive and legislative branches of the US government. They are tasked with providing a regulatory framework and legislative proposals, including potentially a national reserve in cryptocurrency.

"These steps are re-writing the approach to cryptocurrency, speeding up the embrace of digital assets in financial services more broadly."

Closer to home and with a federal election due to take place in the first half of the year, Bowler believes that there is growing support for cryptocurrency at the political level.

"In Australia, with an election looming, we are hearing greater cross-party support for crypto.

"This will have a longer-term impact with legislation and regulation coming online. This is part of an encroachment into the Australian mainstream, including the possibility of regulated financial advice in due course."

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