Alan Brown – Trainee Investment Manager
Facebook enjoyed years as the king of social media. A website that has grown from the dorm room of its creator Mark Zuckerberg to a multi-billion dollar Nasdaq listed company. To this day, the site can boast of around 2 billion daily active users; just under a quarter of the entire world’s population. In the UK alone, 66% of the population are active Facebook users. Given how successful Facebook has been in permeating so many facets of modern life, you could be forgiven for assuming the company would continue to excel. This isn’t quite the case. Recently, shares of Meta, the owner of Facebook, plummeted 26% on a single day of trading, erasing over $200 billion from Meta’s market capitalisation, in what was a record one day market cap loss for a US company. This fall came on the back of disappointing fourth-quarter results, announcing the first drop in daily active users in its 18 year history and slower revenue growth. This downgrade in earnings outlook took the market by surprise but was by no means unique to Facebook alone. A number of US technology companies came under pressure, as investors anticipated policy tightening by the U.S. Federal Reserve.
Facebook is a very widely held company by investors in the UK, whether directly through ownership of individual shares or indirectly through exposure in collective investment vehicles. It would be reasonable to assume that a large portion of UK investors have some form of exposure to the company. Such a fall in a share price can have a significant impact on a portfolio, particularly those with high concentration to a single company. Just ask Mark Zuckerberg, whose net worth is estimated to have fallen by around $29 billion following the recent events at Facebook. This is of course an extreme situation, where such a large holding in a single company is expected given the aforementioned position as Chief Executive Officer of the business. It does however offer a helpful reminder to investors of the importance of maintaining a well diversified portfolio.
Diversification is the risk management strategy that mixes a wide variety of investments within a portfolio. By including a mix of distinct asset types, investment vehicles and global investments, a portfolio can attempt to limit exposure to any single asset. The rationale behind this is that a portfolio constructed of a variety of different kinds of assets will, on average, produce higher long-term returns and lower the risk of any individual asset. Through diversification, investors can remove unsystematic risk, this being the risk associated with a single company or industry. By maintaining well diversified portfolios, investors can shield their wealth from significant losses as a result of poor performance by a single company. Of course, systemic risk cannot be diversified away, as global events will always spark major collapses in the wider economy or specific industry; think of the Financial Crisis and Covid-19 Pandemic. There is no such thing as entirely riskless returns. However, investors should always endeavour to hold well diversified portfolios that will offer a reasonable level of protection for their wealth.