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Diversification

Diversification spreads your risk across numerous financial investments, reducing the impact that poor returns from any one investment is likely to have on your overall portfolio.

Diversification follows a simple logic:

  • The prices of shares, bonds, listed property and other investments often do not rise and fall in tandem. When one type of investment is on the rise, another may be declining.
  • By investing in two or more types of securities, you increase the possibility that when something you own is doing poorly, something else you own will be doing well. Your winner's good performance can offset your loser's disappointing returns.
  • The end result: Your portfolio's overall performance is likely to be less volatile - that is, undergo less price fluctuation - than a portfolio invested in just one security, or one type of security. Accordingly, a well-diversified portfolio typically achieves smoother returns than an investment in a single asset class.

You can spread your risk by investing in:

  • All main asset classes: cash investments, bonds, property (listed or direct, or both), and shares.
  • Various types of investments within the main asset classes, for example both short-term and long-term bonds, and both Australian and international shares.
  • Managed funds, rather than individual securities. Managed funds pool your money with that of many other investors to buy an array of securities within a single asset class, or even across more than one asset class.

Keep in mind that diversification does not and cannot eliminate market risk - the possibility that a particular market will decline over short, or even extended, periods.

Market Update

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