How to get the right mix of assets
When you’re investing, it’s critical to get the right mix of assets to ensure you’re in the best financial position. During the GFC, sharemarkets around the world slumped while Australian property prices held up relatively well. But this isn't always the case. At other times the sharemarket may significantly outperform property.
Diversification as a strategy will help reduce investment risk by spreading your investments across the three key sectors of asset classes, markets and investment funds.
Diversification supports your portfolio as a whole, with the aim of balancing losses in one investment against gains in another.
The benefits of diversifying – By holding a diversified portfolio, you will never equal the top return for any given year, but nor should you equal the lowest, and the more ways you diversify, the more likely you are to reduce your risk.
You can achieve a diversified investment portfolio in many ways. You can diversify within asset classes in addition to investing across different classes. You may also choose to diversify inside or outside of superannuation or by holding more than one investment within each sector. Diversification can also mean holding more than one type of fund or using more than one fund manager when investing in exchange traded or managed funds.
Look to overseas markets – Investing overseas will also help diversify your portfolio by lessening its dependency on just one market. You will also gain exposure to the economies of other countries, which may perform well when Australia is not, and you could benefit from exchange rates.
Understanding asset classes – Most investments fit into one of four main asset classes:
- Cash (e.g. money in the bank or a term deposit)
- Fixed interest (e.g. government or corporate bonds)
- Property (e.g. real estate investment trusts or direct property)
- Shares (e.g. companies listed on the ASX or exchange traded funds).
These four asset classes can be separated into two broad groups: defensive and growth investments.
Defensive investments – Cash and fixed interest are defensive investments, which aim to provide steady income with stable returns. Defensive investments have less risk but do not usually grow in capital value. Returns are generally lower than growth investments over the medium to long term
Growth investments – Property and shares are growth investments which can provide income, as well as an increase in capital value, however are potentially subject to more volatility along the way. While returns may fluctuate over the short term, growth investments have the potential to produce higher returns than defensive investments over the medium to long term.
The general rule to keep in mind is the higher an asset's growth potential over the long term, the greater the short-term risk.
By choosing an investment strategy with the right mix of growth assets and defensive assets you can achieve the right balance between risk and return for your investment timeframe and individual investor profile.