Diversification Strategy, Diversified Portfolio Benefits

What are the benefits of diversification?

Investing in a diverse range of assets means that if one set of assets falls in value, the value of your other assets will hopefully buffer you against losing too much. The aim is to spread and minimise the risk of downturns in the market, and this approach is followed by most careful investors.

By diversifying you’re also better placed to see a positive return from those assets that are performing well as it’s common for one type of asset to increase in value when others are dropping, as investors seek safer or more profitable alternatives. By spreading your investment, you’re more likely to achieve a satisfactory result.

How does a diversification strategy work?

There are many different types of diversified portfolios. Some simply cover different types of shares – from safer blue-chip stocks to more volatile ones – while others cross diverse assets such as lower risk cash, medium risk property and bonds, and higher risk shares, commodities and foreign currency.

How do I achieve a diversified portfolio?

Managed funds can offer diversification in a single package, or you can do-it-yourself with shares, term deposits, government bonds and property investments – either directly or through a listed property trust. A financial planner can guide you through the alternatives and your super fund can guide you through your superannuation investment choices.

What is risk diversification?

Spreading your risk across different assets is the fundamental principle of diversification. Different assets carry different types of risk and return – generally the lower the risk, the lower the return. How you balance your risk often depends on how long you’re willing to keep your money invested.

As a general guideline, the longer you’re willing to wait, the more risk you can probably afford to take, which means skewing your diversification towards higher potential risk and return. By contrast if you only want to invest your money for a shorter term, you’d probably want to play it safe. The returns may not be as high, but you’re less likely to lose money in the short term.

What is a diversified super fund?

Good superannuation funds always offer a diversified investment option. All the Industry SuperFunds do. Some funds go further and offer pre-mixed options selected by experts. By combining these you can tailor your portfolio to balance growth against stable to your satisfaction.

Is age a factor in choosing investments?

Yes, it usually is. As you get older and closer to retirement, it’s wise to reassess your finances, especially your super investments. Have a chat with your superannuation fund’s financial planners to ensure that your super is being invested in a way that matches your attitude to risk, and the potential for negative returns before you retire.