There are many paths that can be taken on the road to building and growing a diversified investment portfolio.
Balancing risk, cost and time in achieving an investment diversification requires careful thought. This video provides some terrific insights into how to get diversified.
Getting adequately diversified takes a bit of effort. If we’re talking about shares, professional investors will generally try to minimise their risk by holding about 40 stocks in their portfolios. Unfortunately, for most investors, owning a larger number of stocks isn't an option, as it becomes too unwieldy, and is not cost-effective for small amounts.
For investors with a smaller amount to invest or who don’t have the time to research stocks and build their own portfolio, unlisted managed funds are handy. A managed fund gives you ownership of a small chunk of a professionally assembled and managed pool of diversified investments that can span multiple markets, asset sectors and targeted investments.
Through managed funds you can share in the ownership of assets you couldn't access yourself, like shopping centres and airports. Managed funds have opened up virtually all of the major asset classes and professional investment strategies to individual investors – and also made diversifying internationally easy.
Listed investment companies are similar to managed funds, but they’re listed: they’re basically a stock that represents an investment portfolio.
There are many different management styles to choose from. For example, you can choose active managed funds, where manager skill gives you a chance of beating the market return, or you can choose index funds, which will give you the market return in that particular asset class. The trade-off is that while an index fund probably can’t outperform the market return, it shouldn't under-perform it, either. An active fund can certainly beat the index, but it could also under-perform.
Self-directed investors can certainly get diversified by choosing their own investments and they've been given some great tools to help. A good example is exchange-traded funds (or ETFs), which are listed stocks that track the returns of asset class indices, portfolios, and even specific investment segments such as high dividend-yield companies or global health care companies.
Technology can also help you to become effectively diversified: from access to cheap online broking, to the use of sophisticated “wrap accounts” that track your transactions, your portfolio’s current value and tax implications all in one place.
Diversification is not simple, so we recommend you seek financial advice before making any decisions about your investments, to ensure your choices are appropriate to your personal objectives, financial situation and needs.