Diversification is often described simply as not having all your investment eggs in the one basket. It can also be described as investing in different asset classes and in securities of many issuers in an attempt to reduce overall investment risk and to avoid damaging a portfolio's performance by the poor performance of a single security, industry, (or country). Taking this definition into consideration over my time in the finance industry I have seen many examples where diversification hasn’t been properly understood including:
- An investor believing, they were diversified by having shares in all of the big banks (which is a single security in a single industry in a single market).
- An investor holding 2/3 of their portfolio in blue chip Australian shares (which is a single security, in multiple industries in a single market).
- An investor holding their portfolio in cash, term deposits and debentures (which is a single security, in a single industry in a single market).
Although these may seem extreme examples, on average Australian Self Managed Super Fund (SMSF) trustees hold on average approximately 23% of their portfolio in cash and around 40% in Australian shares. Although this may be considered a sound portfolio strategy, cash investments are paying less than 2% and Australian shares approximately 4.3% with 80% of SMSF pre-retirees concerned about not being able to afford their preferred lifestyle in retirement.
There are a number of investors that feel that diversification is overrated as they believe diversification brings higher overall costs, additional accounting and tracking of investments and the potential risk of significant underperformance. However, with such solutions such as managed funds, Electronically Traded Funds (ETFs) and exchange traded bonds available it has never been more affordable to diversify your portfolio and invest in a variety of asset classes, industries and countries. If done correctly diversification can also offer investors access to non-traditional/ alternative investments which can improve returns, lower risk and volatility.
Attached is an article that explores practical ways to diversify your portfolio and which reinforces our unlisted commercial property fund offers, so if you’d like to know more then please get in contact and we’ll take you through how we can assist with the diversification of your portfolio.