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.
For more on diversified portfolios and construction click here https://www.investsmart.com.au/invest-with-us
Effie Zahos is an independent Director of InvestSMART, money commentator at Canstar.com.au and Channel 9 Today Show.