Diversification is a risk management technique and strategy. Put simply, diversification means using a variety of different asset class investments within a portfolio. The appropriate asset allocation with an investor’s portfolio depends on the individual investor’s time horizon, financial goals and risk tolerance. There are important tradeoffs between the goals investors have in each respect.
The main fundamental asset classes are cash, shares, bonds and property.
The aims of diversification are to reduce portfolio volatility and the risk of permanent capital loss. The strategy can be neatly summed up in the adage “Don’t put all your eggs in one basket”.
The rationale behind the technique is that a portfolio of different types of investments that will on average yield optimal returns while moderating or offsetting the risk posed by any individual investment within the portfolio.
Diversification should be implemented across two levels: between asset classes and within asset classes. This mix will deliver an outcome that will provide improved long-term performance for investment portfolios.
For a discussion with one of our Private Wealth Advisers about diversification in your portfolio call 1300 788 568 to speak to one of our Private Wealth Advisers.