What you need to know about diversification
Diversification is one of the key concepts of investing. What’s it all about and how does it affect your financial planning?
More and more, Australians – both within the Whitsunday Shire and outside it – are catching the investment bug, branching out into a wider variety of assets in order to build their wealth. An Australian Securities and Investments Commission survey from December last year found more than one-third of respondents had money in something other than their house and superannuation.
You might also be thinking about investing for the purposes of financial planning. If so, it would help to know some of the basics around investing, and get to know some of the core concepts you’ve probably heard of, but have no idea the meaning of. Take ‘diversification’, for example.
Diversification is a key concept of investing, and if you asked most investors, they would likely tell you it’s integral to meeting your financial goals. It’s a strategy for managing risk and making sure you can continue to meet your financial goals even if you suffer some turbulence.
The idea is that, rather than putting all your eggs in one basket, you’ve got a wide pool of assets you’re dealing with.
A diversified portfolio will have money invested in a number of different assets and even industries. For example, you might have money in property, stocks, bonds and superannuation, and even your stocks might be spread out across a number of different risk levels and companies. You might also think about investing in assets from different countries, so you’re protected from any economic turmoil that’s concentrated in one nation.
The idea is that, rather than putting all your eggs in one basket, you’ve got a wide pool of assets you’re dealing with. This way, if one of your investments suffers some kind of cataclysmic event – share prices suddenly drop, for instance – you’re insulated from disaster, as the rest of your investments are unaffected. Your property investment, for example, won’t be connected to the movements of the share market.
Eggs and a single basket can be a bad recipe.
There’s evidence that Australian investors are still yet to realise the importance of diversifying their investments. According to the ANZ Survey of Adult Financial Literacy in Australia for 2014, only 72 per cent of Australians believed diversification was ‘very’ or even ‘quite important’, a decrease from the previous year. Hopefully, you’re not one of the 28 per cent.
How do I diversify?
As with everything financial, there’s no guaranteed recipe for success that will suit every individual. The way you diversify your portfolio will depend on factors like:
- How much risk you can handle
- What your financial goals are
- What your investment time frame is
You should talk to Eclipse Financial – your local financial planner in Airlie Beach, Bowen, Cannonvale and other areas of the Whitsundays if you want to know how to diversify your investments. We’ll provide expert insight into what could work for you!