We’ve all heard the old adage “don’t put all your eggs in one basket” and nowhere is it more relevant than to investing. So why is it important to diversify your investment portfolio and what does it mean?
Having diversity in your investments will allow you to minimize the risk you take. So if there is a dip in the market in one sector or a company you’ve invested in is struggling it will only affect a portion of your investments.
How Do You Diversify?
So what does a diverse or balanced portfolio look like? There are many different types of investments but the major three asset classes are:
Within each of these asset classes are different types of investments again and it can be a good idea to choose a variety of investment types within the asset classes.
Investments in cash include bank accounts and term deposits. These are considered very safe investments but with very little returns. It’s a good way to balance your portfolio in case of any major disruptions in the economy. In case of a stock market crash or property slump, you will have cash to fall back on.
Direct property is where you purchase an investment property. This can be either residential or commercial.
Managed property is where you invest in a Retail Property Trust (such as Westfield).
Direct shares are where you purchase specific shares. You have more control over how you invest but need to educate yourself on the shares you are investing in. It’s also a good idea when purchasing direct shares to buy a range of stocks in different industries.
You can invest in a managed fund in which your money is pooled with other investors and an investment manager is paid a fee to buy and sell shares (and sometimes other assets) on your behalf. These generally will have a diversified portfolio and can be good for people who are not experienced with the stock market or just to balance your direct shares.
You also have the option of purchasing shares in Australia or internationally. This can reduce effects on your investments from local economic issues.
You don’t need to invest in all the types of investments listed above or even all the asset classes. However, if you are currently have most of your money tied up in one type of investment it’s a good idea to review the way you’re investing. If you need help to diversify your portfolio your financial adviser can help you draw up a plan.
Donna has over 17 years experiance in the financial industry and is practised in all facets of financial planning, including retirement, wealth creation, gearing, superannuation and risk insurance.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.