Diversifying is the only way to avoid the volatility of the market and investors' portfolio, Phillip Mutual Bhd chief strategist Phua Lee Kerk said.

He said the basic nuts-and-bolts asset allocation of stocks, fixed income and cash, although not a popular investment strategy now, was all that was needed to earn a good long-term total return.

Phua said typically, investors were loading up their portfolios with alternatives and exotic asset classes that might not provide much diversification.

Investors should understand that portfolios in which all the assets appreciated would demonstrate that the notion of diversification was not well understood.

"Diversification means that some assets will go up while others go down," he said in an interview.

Hence, how much to put in equity, fixed income and cash was individual-specific, he said.

"Understanding one's own risk return requirement and then establishing an appropriate asset mix plays a key role in determining how much to invest in equity, fixed income and cash and not when is the right time and which asset class is better," Phua said.

Portfolio's asset mix should reflect an investor's goals at any point in time and not the market sentiment, he said, adding that, in a globalised world, investors should recognise that economic conditions would frequently undergo seismic shifts.

"It therefore should not be any wonder that the dynamics of global financial asset prices, which must ultimately reflect the supply and demand of real assets, have become less stable in recent years.

"In today's complicated and sophisticated world, it is impossible for us to have a complete picture on how the economy and individual asset class will perform in the short term," he said.

Phillip Mutual Bhd is the Malaysian unit trust management company of the Phillip Capital Group. -- BERNAMA