Diversification is one of the simplest and most effective risk reduction tools an everyday investor can hang on their belt. And it needn't take hours of stock picking to employ. Some S&P/ASX 200 Index (ASX: XJO) shares offer a degree of built-in diversification – Wesfarmers Ltd (ASX: WES) being one.
However, I wouldn't rely on the stock to diversify my portfolio if it was already retail-heavy.
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Wesfarmers is a diversified ASX 200 share, but…
Wesfarmers is, of course, just one company. However, its multitude of businesses surpass sector borders, thereby providing some built-in diversification.
Most Aussies will know the ASX 200 share for its headline retail brand, Bunnings. They'll also likely be familiar with discount retailer Kmart, its sibling Target, and Officeworks.
But there's far more to the company than meets the eye of most consumers.
Wesfarmers also boasts a chemical, energy, and fertiliser segment, supplying products including ammonia, phosphate, nitrogen, and potassium-based fertilisers, and polyvinyl chloride resins.
The company is also involved in the mining sector.
It might surprise the uninitiated to learn that Wesfarmers has a 50% stake in the Mt Holland lithium mine. It also owns Western Australia's only manufacturer of sodium cyanide – used by miners to extract gold.
To the health sector, Wesfarmers has recently branched out into pharmacies, health, and beauty. It snapped up the owner of Priceline in a high-profile bidding war involving Woolworths Group Ltd (ASX: WOW) last year. It's now got its eye on another acquisition in the space – listed aesthetics clinic operator Silk Laser Australia Ltd (ASX: SLA).
Why I wouldn't turn to the ASX 200 stock for diversification
Diversifying your portfolio means spreading your investments out over various companies, sectors, and asset classes to protect against isolated downturns and make the most of single-sector or asset-class swings.
In similar steed, Wesfarmers may find its overall earnings protected if one – or a handful – of its businesses suffer a rough patch. However, not all of the conglomerate's brands can offer equal protection.
Of the $22.6 billion of revenue the company brought in last half, $9.8 billion came from Bunnings. Another $5.7 billion came from Kmart and Target.
Thus, Wesfarmers is still, for the most part, an ASX 200 retail share.
For that reason, I doubt adding it to an already retail-heavy portfolio would be a worthwhile diversification move.
Though, I might look into the company if my portfolio were looking a little light in the consumer discretionary department.
