Why you should diversify your investments
Variety isn't just the spice of life. It can also add value to a portfolio.
If we all had perfect insights into the future, it would be possible to pick just one winning investment and hold onto it for as long as our crystal ball suggests.
In reality though, the future is far from certain, and investment markets are always changing.
That's why diversification - spreading your money across a variety of different investments - is one of the long-held ground rules of successful investing.
Diversification smooths returns, lower risk
Each of the classic asset classes - cash, fixed interest, property and shares, move in different directions at different times. When interest rates are high, for example, property values tend to cool.
By diversifying your portfolio, you won't wear substantial losses if any one asset class, sector, or single investment performs badly. The other investments in your portfolio can take up the slack and compensate for lower returns in an under-performing investment.
In this way, diversification helps investors smooth out returns and lower risk.
Finding the right blend
I've previously looked at how investments are typically classified as either 'defensive' or 'growth' assets. For most investors it makes a lot of sense to have a blend of these two types of investments in their portfolio.
Finding the right combination can seem complicated. However, it starts with thinking about your financial goals.
Are you looking for income with low volatility for instance? Or, are you comfortable taking on more risk?
Your needs and preferences can help you decide whether to lean more towards defensive assets such as fixed income, or if you could benefit by having a higher weighting in shares.
The 60/40 approach
One strategy that some investors find useful is the '60/40' principle.
This involves having 60% of your portfolio in shares, and 40% in fixed income assets.
It provides a simple rule of thumb to diversify, with the being that the 60:40 guidepost combines the growth potential of shares with the stability and regular income of fixed interest.
Or, you may like to diversify by deciding a unique asset mix of your own.
Looking for diversification within investments
You can take diversification even further by looking for asset managers who bring diversity to the investments they offer.
By way of example, La Trobe Financial's Term Accounts are backed by 'complex prime' mortgages. These are typically home loans offered to self-employed borrowers such as doctors, who don't fit the banks' automated underwriting models.
Each of La Trobe Financial's portfolios are underpinned by a vast number of mortgages, in some cases over 10,000 different loans. This means that no single mortgage can impact overall returns for our investors.
The main point is that because La Trobe Financial has diversified, our investors can add more diversity to their own portfolios through a single investment.
The bottom line
No one knows the future. Don't gamble yours by relying on one type of investment only. The more you diversify, the more you reduce risk across your entire portfolio.
La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence 222213 Australian Credit Licence 222213. Financial product advice in this article is general only and does not consider your personal circumstances. Consider the PDS and TMDs on La Trobe Financial's website latrobefinancial.com.au before investing.
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