Importance of diversification in times of volatility.

Make sure your investment portfolio is well diversified.

The impacts of the COVID-19 pandemic have been widespread and have led to significant volatility across domestic and global markets. With this volatility predicted to continue, it is now as important as ever to ensure your investment portfolio is well diversified to help ride out this expected volatility.

What is diversification?

Diversification is a way of spreading the risk associated with investments, or more simply, not putting all your eggs in one basket. The ultimate goal of diversification is to reduce the volatility associated with an investment portfolio without forgoing investment returns.

Whilst diversification should be considered an essential component of every investment portfolio, it is of times of significant market volatility such as the impacts of the COVID-19 pandemic, where understanding and constructing a well diversified investment portfolio becomes most beneficial.

Why is diversification important?

Diversification is an important aspect of an investment portfolio as not all investment types are positively correlated, in other words, not all investment types will react in the same way when exposed to a particular set of market conditions or economic events. For example, in times of low interest rates, one type of investment such as property might perform strongly in comparison to another investment type such as fixed interest. Diversification can help minimise the peaks and troughs associated with each investment type in an attempt to generate consistent investment returns within an investment portfolio on a consolidated basis.

Even during times of significant market volatility such as the COVID-19 pandemic, diversification in an investment portfolio may help to minimise losses as not all investment types will be impacted in the same way or to the same extent as one another.

How to diversify your investments?

There are several strategies that an investor can use to diversify an investment portfolio. Some of the main diversification strategies include:

  • Invest within and across a wide variety of asset classes:
    • There are several different asset classes available to investors, such as; cash, fixed interest, bonds, equities, property and alternatives.
    • Within each asset class there are several investment types (i.e. industry sectors, geographical locations etc) available to invest in.
    • Investing in a wide variety of asset classes and across several different investment types (i.e. industry sectors, geographical locations etc) may help to minimise the impact of one asset class performing poorly relative to another asset class within the investment portfolio.
  • Invest in managed funds and/or Exchange Traded Funds (ETF’s):
    • Managed funds and ETF’s are professionally managed investments where the fund manger makes investment decisions on the investor’s behalf for a small fee.
    • Managed funds and ETF’s allow investors to access a diversified investment portfolio which is made up of several different asset classes and investment types.
    • These products can also be a useful means of achieving diversification in a portfolio when you are working with a smaller asset base.
  • Determining an asset allocation and rebalancing:
    • Determining an investment portfolios asset allocation involves the investor deciding on the percentage they would like allocated to each asset class within their investment portfolio.
    • The percentage an investor chooses to devote to each asset class will depend on their tolerance to risk and what timeframe they choose to invest for.
    • Once the asset allocation is determined, an investor should look to rebalance their investment portfolio regularly to ensure their investments remain in line with their desired asset allocation and do not become over exposed to particular asset classes or investments.

Our Financial Specialists can assist you in this process by reviewing your existing portfolio of investments or discuss with you the opportunity to start to build an investment portfolio. For all other information please contact an Accru Advisor who can assist you further to achieving diversification objectives within your investment portfolio on (03) 9835 8200.

DISCLAIMER: Information not Expert Advice and Subject to Change

The content of this blog is intended only to provide a summary and general overview on matters of interest and does not constitute expert advice nor intended to be a substitute for expert advice. The content of this blog may include technical inaccuracies and the information may change from time to time without any notice. We attempt to ensure that the content is current and note that it’s based on available information as at 26th April 2020.

About the Author
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Trent Goodey , Melbourne
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