Diversifying Your Investments
Diversification is a tool that helps to reduce the risks of investing. In simple terms, diversification means 'not putting all your eggs in one basket'. As the value of the various assets can rise and fall at different rates and times, it's a good idea to spread your investment across a range of asset classes to reduce the overall risk in your portfolio. Diversification generally reduces the likelihood of any single asset class adversely affecting the value of your overall investment portfolio.
The Trustee has introduced diversification rules into this product to ensure that your investment risk is spread across the asset classes.
|
Diversify across asset classes |
Diversify investment securities |
|
Invest in a number of companies |
Spread investments across |
|
Diversify investments by country |
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Diversify across asset classes
Asset classes are the building blocks of an investment, such as shares, property, fixed interest and cash.
All asset classes have different risk and return characteristics. No asset class will consistently be a top performer. As you can see from the table below, the return on assets classes increases and decreases over time.
| Return (%pa) to 30 June | ||||||||||
|
|
2005 |
2004 |
2003 |
2002 |
2001 |
2000 |
1999 |
1998 |
1997 |
1996 |
|
Australian Shares |
26 |
21.7 |
-1.6 |
-4.5 |
9.1 |
15.1 |
15.3 |
1.6 |
26.6 |
15.8 |
|
Overseas Shares - In A$ |
0.1 |
19.4 |
-18.5 |
-23.5 |
-6 |
23.8 |
8.2 |
42.2 |
28.6 |
6.7 |
|
Property |
13.3 |
11.9 |
11.1 |
9.9 |
10.4 |
10.9 |
9.4 |
10.2 |
6.3 |
6.6 |
|
Australian Fixed Interest |
7.8 |
2.3 |
9.8 |
6.2 |
7.4 |
6.2 |
3.3 |
10.9 |
16.8 |
9.5 |
|
Cash |
5.6 |
5.3 |
5 |
4.7 |
6.1 |
5.6 |
5 |
5.1 |
6.8 |
7.8 |
|
Overseas Fixed Interest |
11.6 |
4.1 |
12.5 |
8.7 |
10.1 |
3.9 |
5.2 |
10.9 |
11.8 |
10.5 |
Investments can go up or down. Past investment performance is not necessarily indicative of future performance.
By investing across all the major asset classes your investment will have exposure to the best performing asset class every year - as well as the worst performing asset class.
However, losses or low returns from a poor performing asset may be partially offset by the performance of the other assets.
Diversify investment securities within asset classes
Investment securities are the actual underlying investments such as individual shares, fixed interest securities or properties.
Diversification goes beyond just investing in different asset classes. Once you've identified the asset classes where you'll place investments, you need to ensure that you select a mix of investments.
There are a number of ways to diversify your investments, you can:
Invest in a number of companies
Certain market, economic or political conditions could spell trouble for one company and success for another. Investing in a number of companies reduces the effect of a fall in the value of an individual stock.
Spread investments across industries and industry sectors
All companies operating in a particular industry can be affected by a change in Government policy or a change in economic conditions. But these same changes may have no effect on another industry - they may even make things better.
Diversifying across industries will help balance out the effect of industry-specific changes and the same principle applies to sectors of the property market such as office blocks, houses, warehouses and shopping centres.
Diversify investments by country
While Australia has the second biggest listed property market in the world, it is still only about one fifth the size of the US listed property market. And while Australia 's sharemarket is among the world's 10 biggest, it still only makes up less than 2% of the value of the world's sharemarkets.
So, if you only invest in Australia, you are missing out on the diversification benefits of investing in different economies, markets and industries.
