Einstein famously referred to the principle of compound interest as the “8th wonder of the world”. However, the power of compound growth can be severely disrupted when markets experience sudden shocks.
We do not have to look back very far. During the recent conflict involving Iran, which escalated on 28 February 2026, global markets experienced significant volatility. From the start of the market weakness until the recovery phase began in mid-to-late March 2026, the approximate peak-to-trough declines were as follows:
- S&P 500 -8% to -9%
- Nadaq composite -10% to -11%
- DAX -7% to -9%
- FTSE 100 -5% to -7%
- Euro Stoxx 50 -8% to -10%
- FTSE/JSE Top 40 -6% to -8%
- Hang Seng -11% to -14%
The picture painted by these numbers is clear: markets can decline sharply over a very short period. Investors who were forced to retire during this time could have seen the equivalent of several years of retirement savings growth disappear almost overnight.
Fortunately, markets have since recovered strongly, reinforcing the importance of staying invested and remaining disciplined during volatile periods.
This once again highlights the importance of diversification in reducing overall portfolio risk.
If we compare the above market declines to a well-diversified balanced fund such as the Allan Gray Balanced Fund, the pullback was materially lower — approximately -4% to -6% over the same period.
The main reasons the Balanced Fund held up better included:
- Diversified asset allocation
- Lower net equity exposure
- Cash and bond holdings
- Active downside management
So, how should investors diversify a portfolio?
- A combination of different asset classes aligned with the investor’s objectives
- Exposure to different geographical regions and markets, as they do not all react the same way during crises
- Exposure to currencies other than the ZAR to help protect long-term purchasing power
- A mix of investment management styles, as no single style performs best in every economic cycle
- The use of alternative investment instruments where appropriate
- Different investment “buckets” to separate short-term income needs from long-term growth capital
At WGA Wealth Group, we make use of model portfolios, among other solutions, managed by Portfolio Analytics and the Optimum Invest Group . These portfolios apply many of the diversification principles discussed above to help reduce overall portfolio risk. A case in point is that some of our portfolios decline by less than 2% during the same period.
It is my submission that diversification closely reflects the “8th wonder of the world” principle famously described by Einstein and that a professional should construct an investment portfolio in line with these principles.
For more information on our investment process and portfolio solutions, please feel free to contact us or visit our website.