Variety - good for life, great for investing
Let me start by saying that diversification is one of those golden rules of investing. It means spreading your money around so that a handful of duds doesn’t drag down your other investments.
Diversity also acts as a cushion, giving your portfolio valuable protection from serious market falls.
You only have to look back 12 months to the start of the pandemic to see how dramatic a major sharemarket rout can be. I came across a line graph of the ASX 200 index that perfectly summed up the fast and furious market plunge of early 2020 – it made the north face of Everest look like a gentle slope. Scary stuff.
During these sorts of downturns, the value of diversifying shines through. Investors who spread their money across a blend of assets would have felt much less impact from last year’s market fall, than someone who focused only on equities.
Thankfully, pandemics are a 1-in-100 year event. Market dips are much more common, and when you take a long term approach they become part and parcel of investing. The best way to manage the inevitable highs and lows is simply by maintaining a diverse portfolio.
This question is, how should you diversify your investments?
There’s no set-in-stone answer. It’s really all about what’s right for you – your goals, life stage and how you feel about risk.
As a general rule of thumb, if you’re in your 20s, 30s and potentially 40s, you can afford to lean towards growth assets, potentially with as much as 80% of your portfolio in Aussie and global shares. Markets have always gone on to recover from past downturns, and when we’re younger it’s a matter of riding out the storm until markets pick up again.
I freely admit, I’m on the other side of 45, but statistically speaking, I could live well into my 80s. So shares continue to play a leading role in my portfolio. As I head closer to retirement, I’ll dial down my exposure to growth assets. That’s the beauty of investing, I can mix and match my choice of assets as I move through life.
I still plan to have growth assets even in retirement. The long term capital growth will prevent my portfolio being eaten away by inflation. And that’s a must because I have big plans for retirement – and a well-blended portfolio will let me enjoy all the variety that life has to offer.
Effie Zahos is an independent Director of InvestSMART, money commentator at Canstar.com.au and Channel 9 Today Show.
For more on diversified portfolios and construction click here https://www.investsmart.com.au/invest-with-us
Frequently Asked Questions about this Article…
Diversification in investing means spreading your money across different assets to reduce risk. It's important because it cushions your portfolio against serious market falls, ensuring that a few poor-performing investments don't drag down your entire portfolio.
During the 2020 market downturn, investors with diversified portfolios felt less impact compared to those focused solely on equities. By spreading investments across various assets, they were better protected from the dramatic market plunge.
There's no one-size-fits-all answer to diversification. It depends on your personal goals, life stage, and risk tolerance. Generally, younger investors can afford to lean towards growth assets, while older investors might reduce exposure to these as they approach retirement.
Growth assets, such as shares, play a crucial role in a diversified portfolio by providing long-term capital growth. This helps prevent your portfolio from being eroded by inflation, which is especially important for long-term financial goals like retirement.
Yes, maintaining growth assets in retirement can be beneficial. They offer long-term capital growth, which helps protect your portfolio from inflation and supports your financial plans during retirement.
Your life stage significantly impacts how you diversify your investments. Younger investors can take on more risk with growth assets, while those nearing retirement might prefer a more conservative approach to protect their savings.
A long-term approach is important because markets experience highs and lows. By maintaining a diverse portfolio and focusing on the long term, you can ride out market downturns and benefit from eventual recoveries.
A well-blended investment portfolio offers variety and protection. It allows you to enjoy the benefits of different asset classes, reduces risk, and helps achieve financial goals by balancing growth and stability.
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