Wise money managers advise that you spread your money around when it comes to investments. This is called diversification — a battle cry for investors who are smart enough to avoid losing their assets in a market swoon.
For over five decades now, diversification has been considered a basic building block of any successful Australian investment portfolio. After all, this don’t-put-your-eggs-in-one-basket strategy reduces risk and dampens volatility in any market condition.
There is one huge myth surrounding investment portfolio diversification, however: simply having many investments already makes your portfolio diversified.
This is wrong. To be truly diversified, you need to have many different kinds of investments. Simply put, go for variety, not quantity.
Diversifying within Investment Categories
Going for variety means having stocks, real estate, international securities, bonds, and cash. Investments in each of these categories do different things for you.
Stocks, for instance, help your portfolio grow, while real estate offers a hedge against stock market inflation. International investments, on the other hand, help maintain your buying power in the globalised world, while bonds bring in income. Cash gives your investment portfolio security and stability.
Diversifying Real Estate
Once you have diversified by putting your assets into the different categories, diversify again. When investing in real estate, for instance, take note that some areas suddenly stagnate while other locations begin to take off. A great example of this is what’s happening to the Sydney property market to date. Rising interest rates and high prices make investors shift to other cities within the country.
Over time, the changing property market tends to favour different locations, which means it pays to invest across different areas. Today, the east is one of the best areas to invest in. According to Resortbrokers.com.au, motels in Queensland are excellent choices for investment.
When it comes to stocks, on the other hand, it’s not enough to buy just one stock — you need to have different types of stocks in that portion of your portfolio. This protects you when one industry takes it on the chin.
There is no doubt that diversifying your portfolio is an important advantage when it comes to investing. But having a diversified portfolio does not simply mean having tons of eggs of different shapes and sizes — it means having a variety of them placed in different baskets. If you don’t, a simple change in market conditions can wipe away your nest pretty quickly.