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Variety - good for life, great for investing

Variety is the spice of life, right? And it can certainly add some spice to your investment portfolio. But there's another reason why diversity is so important for investors.
By · 17 Mar 2021
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17 Mar 2021 · 5 min read
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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.

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