The benefits of investment diversification

ASR Team

Self-directed investors have relied on Australian Stock Report for over 20 years to provide them with comments on the Australian stock market and useful insights. We provide Australian investors with market news and research to make decisions that would help manage their savings, build a sustainable income, and potentially achieve capital growth.

When it comes to financial management, no single investment will continually outperform all other investments all of the time. To minimise potential losses and to smooth your investment returns over the longer term, you should spread your shares ASX portfolio across various investments. But that can be easier said than done so there are different ways to diversify.


Diversify across asset classes

Asset classes are the broad categories of investments and include equities, fixed interest, property and cash investments. Equities include both Australian shares ASX and international shares. Fixed interest includes government, semi-government and corporate bonds. Property includes residential, retail and commercial properties. Cash includes term deposits and at-call cash accounts.

Lower risk asset classes, including fixed interest and cash, protect your capital during adverse market conditions. On the other hand, higher risk assets, such as Australian shares ASX and international shares, can deliver good returns during the boom times. Holding a mix of asset classes may help to provide more stable returns over the medium to longer term as markets, including the share market in Australia today, rise and fall.

Diversify within asset classes

This could mean spreading your shares ASX portfolio across numerous different industry sectors because certain sectors may outperform others over a given period according to economic conditions.

Two good examples 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 with a relatively modest amount to invest and very little time, you can achieve a balanced portfolio with the right mix of investments.

Managed funds offer easy access to a wide range of investments. By investing in a managed fund, professional fund managers select individual investments for you. In addition, most managed funds offer several different options to cater for varied levels of investment risk.

Other options include purchasing shares ASX in Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs) on the stock exchange. Depending on its charter, a LIC holds shares in a wide range of companies, while ETFs invest across all shares ASX making up a particular index, such as the S&P/ASX 200. Buying shares ASX in an ETF or LIC gives you exposure to all the stocks held by the fund.

Register for our latest webinar to learn more about the best ways to manage your investment risk and stock recommendations.  



Past performance is not an indicator of future performance. This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purposes only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceedings. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

New call-to-action