The investment landscape today is full of many potential lucrative opportunities. Thanks to digitalisation, Robo-advisors and algorithms are rapidly gaining traction.
If you are looking for ways to diversify your portfolio, you will be spoilt for choice. But first, let’s understand the importance of portfolio diversification.
Why do you need portfolio diversification
Whether SMSF investing, day trading or passive investing, portfolio diversification provides an essential investment risk management strategy.
Markets always go up, right? Wrong. With any investment you make, there is a level of risk attached to it and not all investments will perform well at the same time. By diversifying your portfolio, you can minimise your exposure to negative investment asset performance.
As the saying goes, ‘don’t put all your eggs in one basket’.
Also known as managed investing, portfolio diversification is defined as a mix of asset types that together limit risk exposure. You can diversify within different asset classes such as shares or bonds as well as across geographical markets.
By reducing risk, portfolio diversification hedges against market volatility and this may offer higher returns in the long run. Remember: variety is the risk-reducing, high-return spice of life.
How to diversify your portfolio
The theory of diversification is that positive performance of certain assets will mitigate negative performance of others and neutralise your overall losses. What does this mean?
Well, to effectively diversify your portfolio, you need a selection of assets that will respond differently to the economic landscape.
With the rise of Robo-advisors, exchange-traded funds (ETFs) are becoming a popular choice for portfolio diversification. ETFs are managed funds that are traded on the stock market like the ASX. Examples of ETFs include Australian shares (NDQ, SPY, IOO), international shares (VOO, QQQ, VEA), and currencies (UUP, FXE, FXY).
With this knowledge, you can diversify your portfolio by choosing a number of different asset classes with ETFs.
Shares and bonds
Shares and bonds in different industries are one of the obvious choices for diversification. To diversify your portfolio, you can simply do so by investing in a selection of sector ETFs. For instance, the technology market is still expanding and may be a solid contender to diversify your portfolio.
Australian alternative investing options
Shares and bonds are an attractive asset class to diversify. Still, it is also worth exploring alternative asset classes in Australia like currencies and commodities.
The crucial element for a successful diversification is that the assets you choose respond differently to economic circumstances. An essential tip to remember is that currencies and commodities generally do not follow the same path as shares and bonds, so choosing ETFs in this class can be incredibly beneficial for diversification.
Is my portfolio diversified?
You’ll know if you have a diversified portfolio if you invest your money across different asset classes — such as cash, shares, property, bonds and private equity. Then you diversify across the different options within each asset class. You might include ETFs and international investments.
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Products issued by Melbourne Securities Corporation (MSC). Please consider the PDS and TMD available on our website before applying. All investments carry risks and you may lose your money. Past performance is not indicative of future performance. The information in this report has been compiled from sources we believe are reliable and we make no warranty in respect of its accuracy.
