August 10, 2023

How diversification helps an investment portfolio

Many people see diversification as a cornerstone of successful investing – and for good reason.

It’s a well known saying dont put all your eggs in one basket. Its an important message about diversification for investors, and its purpose is to avoid getting caught if a particular asset class, like shares or property, enter an extended slump. Such events have the potential to wipe out a lot of wealth. Yet this is exactly what many investors do, often unwittingly. 

Property investors, for instance, are often homeowners, meaning a significant proportion of their wealth is likely tied to the property market. If values cool, their personal wealth can take a blow in a way that mirrors market movements. 

Diversification provides some protection from this type of impact because different asset classes don’t always move in sync. In fact, they typically behave quite differently at different times. We have witnessed a great example of this in recent years with cash-based assets delivering very low returns while residential property experienced strong gains until rising interest rates cooled the market.

Smooth out returns, minimise risk

By diversifying your portfolio across a range of different investment classes, you can enhance your ability to earn good long-term returns and reduce your exposure to market highs and lows (also known as volatility). All this helps to reduce the level of risk in your portfolio. 

At certain times, parts of your portfolio may significantly outperform others, creating the temptation to double up your investment at the expense of other parts of your portfolio. It’s the type of choice all investors face from time to time, but it can creates the risk of being too concentrated in a certain asset class. 

Your age will also influence your decisions. Younger investors tend to accept more risk, partly because they may not have experienced many market cycles, but also because they have more time on their side to ride out market shocks and wait for value to return to their investments.   

But diversification isn’t just about the value of the returns you earn. Diversifying can also give you a degree of protection against unexpected tax or legislative changes that impact on a particular asset class.

Investment: a world of choice

How you diversify will depend on your age, income, personal circumstances, and attitude to risk. There is a world of choice when it comes to the investments available to Australian investors, including shares and property, a wide variety of fixed income instruments and structured products and commodities. Most asset classes can give you an exposure to the local market or international markets, opening up further diversification opportunities and opportunities to gain currency exposure to further enhance your returns. 

When it comes to investing, none of us knows what the future holds. So beware of limiting your investments to just one or two types of asset class.

To find out more talk to your Private Banker or talk to us at NAB Private Wealth

Important Information 

The information contained in this article is gathered from multiple sources believed to be reliable as of the end of May 2023 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on the information in this article you should consider whether it is appropriate for you’re your objectives, financial situation or needs. You should seek independent legal, financial and taxation advice before acting on any information in this article. ©2023 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB does not guarantee the accuracy or reliability of any information in this article which is stated or provided by a third party. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. You may be exposed to investment risk, including loss of income and principal invested.

You should consider the relevant Product Disclosure Statement (PDS), Information Memorandum (IM) or other disclosure document and Financial Services Guide (available on request) before deciding whether to acquire, or to continue to hold, any of our products. 

All information in this article is intended to be accessed by the following persons ‘Wholesale Clients’ as defined by the Corporations Act. This article should not be construed as a recommendation to acquire or dispose of any investments. 

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