Portfolio diversification is a simple and powerful tool investors can use to help mitigate risk and achieve more consistent returns within their investment portfolio.
It means investing in a variety of different asset classes to limit your exposure to any one particular sector. As renowned investor and fund manager Sir John Templeton once said, “The only investors who shouldn’t diversify are those who are right 100% of the time.”
Put simply, portfolio diversification means don’t put all your eggs in one basket.
How diverse is your portfolio?
To assess the diversity of your portfolio, list all of your investments and what they’re worth. This may include cash in savings accounts and term deposits, equities and ETFs, fixed income investments, cash style investments, and property holdings such as direct property ownership or investment via a property trust. Reviewing the asset classes you’re currently invested in can help to understand the balance within your portfolio.
As a first step, consider your diversification across growth and defensive investments. The right balance between the two will be determined by your personal objectives, financial circumstances and risk appetite. Engaging a licensed professional to assist you with this may be beneficial.
A higher weighting of growth assets is generally more suitable for long-term investors who are able to withstand market volatility, while those more focused on generating a consistent income and lowering their risk of potential and significant capital loss should hold more defensive assets within their portfolio.
Choosing the right investment mix can be challenging. We recommend seeking advice from a licensed financial adviser before making any investment decisions.
If most of your wealth is currently invested in only one or two assets or asset classes, there may be opportunities to further diversify your portfolio. In the case of equities, for example, there are opportunities to pursue several different types of diversification at once, including industry, company size, and region.
The same principle applies across other asset classes too. In the case of property, for example, if a single investment property makes up a large proportion of an investor’s portfolio, this could mean their risk is highly concentrated.
By investing in property indirectly through a vehicle such as a diversified property fund, they may be able to gain wider exposure to different property types and locations, which can perform very differently to each other over time.
During the COVID-19 pandemic, for example, some retail property values have been impacted while the industrial property sector has generally performed much better.
An ongoing process
Portfolio diversification is not a ‘set and forget’ exercise, and ongoing portfolio maintenance is important. This is because investors’ personal circumstances and risk profiles change over time, as do the values of their assets.
To manage the diversification of your investment portfolio, we recommend seeking advice from a licensed financial adviser.
Learn how an investment in the Trilogy Monthly Income Trust could offer diversification as part of a balanced portfolio >
This article was prepared by Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) and does not take into account your objectives, personal circumstances or needs nor is it an offer of securities. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 17 December 2018 for the Trilogy Monthly Income Trust and available from www.trilogyfunds.com.au. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy, involve risk which can lead to loss of part of or all your capital or diminished returns. Trilogy is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed adviser to conduct an analysis based on your circumstances. Investments with Trilogy are not bank deposits and are not government guaranteed.