What is Diversification?

 
Date: 30 September 2016

In an ever changing world, there are many factors that can move markets very quickly. In this video, we help to understand what diversification actually means from a personal investment perspective and explain how this can help manage the overall investment risk.

 

We have all heard the old adage – “don’t put all your eggs in one basket”- well, investing is no different. By spreading invested funds across a number of different assets you can reduce the overall risk for your portfolio, as you’re not relying on only one or two assets as your investment.

It’s called ‘diversification,’ and while it doesn’t guarantee that you won’t make a loss if the general direction when markets are down, it can reduce the risks associated with investing.

The world changes every day: unpredictable political, social and economic factors can move markets very quickly and not all markets react in the same. It is best to spread your risk over multiple markets and assets so your whole portfolio does not get caught in any single negative event.

The aim is to hold assets that do not always move up and down together all the time. This is called low correlation – as one investment doesn’t perform, hopefully another investment in your portfolio goes up and therefore creates a balanced result for the portfolio overall.

On any day, some of your assets may win, some may lose, but overall the result should be that the portfolio rises in value in the long term.

But diversification isn’t just a protective measure; it may also allow you to generate a higher rate of return for a given level of risk.

There are several different kinds of diversification. There is diversification within an asset class – as in having a diversified share portfolio of different companies and industries. Then there is diversifying across asset classes – cash, fixed interest, shares and property; and finally, there is diversifying outside Australia.

Studies have shown how you diversify your portfolio – or your asset allocation – can be one of the most important investment decisions you make.

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.



Disclaimer

This information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 23097, ARSN 604 930 252. It contains factual information and general financial product advice only and has been prepared without taking into account your individual objectives, financial situation or needs. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to your particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this information (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.