The benefits of investment diversification
Why you should invest across different assets:
Overtime different investments will outperform each other. Therefore to smooth your investment returns over the long-term and mitigate any potential losses, you should spread your spread your investment portfolio.
Diversify across asset classes
Asset classes entail the broad categories of investment including; Equities, fixed interest, property and cash investments. Equities include both Australian and international shares. Fixed interest includes government, semi-government and corporate bonds. Property includes residential, retail and commercial properties. Cash includes term deposits and savings accounts.
Holding a mix of asset classes will help minimise potential risk in the long term and deliver strong returns during boom times. For example fixed interest and cash present lower risk whereas, Equities present greater risk yet higher returns.
Diversify within asset classes
This involves spreading your share portfolio across different industry sectors, this ensures you benefit from booming economic conditions in different sectors.
Two good examples specific to the Australian industry are mining and manufacturing. The Australian resources industry helped keep Australia’s economy a shining light against a gloomy international backdrop following the Global Financial Crisis. Manufacturing, on the other hand, struggles with high labour costs making Australia less competitive against low income countries such as China. Nobody knows what the future holds – both of these industries are facing volatile conditions a few short years later – so a balance across industries is crucial.
It can be simple
Even when starting out with little time and a modest amount to invest, you can create a balanced portfolio with the right asset mix.
Managed funds offer easy access to a wide range of investments. Professional fund managers within your managed fund will select individual investments for you catering towards your desired risk.
Other options include purchasing shares in Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs) on the stock exchange.
To learn more about how investing can build your wealth, contact us.