Why Should You Diversify?
Investing always involves some level of risk. But diversification is one of themost effective ways to manage that risk while still aiming for solid returns.By holding a variety of investments that respond differently to market changes,you create a balance where gains in some areas can offset losses in others.
This approach helps smooth out the ups anddowns in your portfolio over time and reduces the chance of a major loss fromany single company or sector.
How Many Investments Are Enough?
There’s no one-size-fits-all answer, but a portfolio containing between 15 to25 individual stocks is often enough for everyday investors to gain meaningfulprotection against company-specific risks.
What matters just as much is choosinginvestments across a range of industries — like healthcare, finance,technology, consumer goods, and energy. Spreading investments across thesesectors means your portfolio isn’t overly exposed to one area of the economy,which might face challenges at certain times.
Diversify Across Asset Types, Too
Diversification isn’t just about shares. It’s about mixing different kinds ofinvestments:
- Shares: Growth assets with higher potential returns but more volatility.
- Property: Can provide steady income and capital growth, accessible through real estate investment trusts (REITs) listed on the ASX.
- Fixed Interest (Bonds & Cash): Lower risk investments that offer more stability but typically lower returns.
- Commodities & Gold: Often act as a safeguard during market uncertainty.
- International Investments: Adding global shares or funds introduces exposure to economies outside Australia, which can perform differently and reduce overall risk.
By including a combination of these assets,you can tailor your portfolio to your personal risk tolerance and goals.
Why Sector and Market Cycles Matter
Different industries react differently depending on the economy’s health. Forinstance, consumer staples like food and healthcare tend to remain stable evenwhen the economy slows down, while sectors such as technology or travel can bemore sensitive to economic growth or setbacks.
Diversifying your holdings across sectorshelps avoid being caught out by an industry-specific downturn — for example,the impact COVID-19 had on travel-related stocks.
