Diversification – why it is important

By Cutcher & Neale Accounting and Financial Services - April 19, 2022

Most would have heard the term ‘do not put all your eggs in the one basket’.

Diversification is designed to lower the risk of an investment portfolio and helps achieve more stable and less volatile returns.

It is achieved by investing across the different asset classes being broadly, cash, fixed interest, property and shares. It is then important to invest across a broad range of options within each asset class.

Across different timeframes and investment cycles, each asset class will do well at different times. If a particular investment in a certain asset class fails or performs badly, you won't lose all your money if you are adequately diversified. A good mix of investments across the various asset classes will balance out the overall risk of a portfolio.

Diversification can often be your best protection against a single investment failing or one asset class performing poorly.

Reviewing your current investments and being able to identify what asset class they belong to will allow you to identify what asset classes you are exposed to and what adjustments may need to be made.

You may discover that most of your money is in one or two asset classes. It is important to research other asset classes.

Australia is only a very small piece of the global investment pie and as such makes up a small part of global investment opportunities. Investing a portion of your portfolio in overseas markets can have the benefit of lowering the risk of investing in a single geographic market.

Over time, your investments and the different asset classes you are exposed to will perform differently. This means your allocation to each asset class will change. This could mean you have a larger amount invested in an asset than you are comfortable with. Regular reviews will enable you to make changes that ensure you are comfortable with the level of risk you are taking.

Achieving the right investment mix can be a challenge and for many all too time consuming.

If you wish to discuss your current investments and asset allocation, please contact Cutcher & Neale Wealth Management on 02 4928 8500 for an obligation free discussion.

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