Diversification is a fundamental principle of wise investment and is a key element of your ability to reduce risk while achieving suitable returns.
You generally stand a better chance of achieving consistent performance over the medium to long term by spreading your investments across a range of asset classes including cash, fixed interest, shares and property, and by having exposure to local and international markets. Deciding how much to invest in each asset class is referred to as 'asset allocation' and goes hand in hand with investment diversification.
Arguably, one of the most important decisions you will make is how much to allocate between the asset classes as your choice will fundamentally determine the long-term investment returns and fluctuations (volatility) of your portfolio.
Successful asset allocation means achieving your objectives with the least possible risk. To do this you need to understand the behaviour of asset classes and products. Traditionally, defensive assets such as fixed interest can pay reasonable income but have little or no growth and are therefore low risk*. Shares on the other hand, have high potential for capital growth and so the risk factor is also higher.
* Not all fixed interest assets are low risk. Many listed fixed interest securities have similar characteristics to shares so offer a higher risk/return profile.
Risk and returns are inextricably linked
Risk and returns are inextricably linked. In other words, do not expect higher returns without higher risk, and do not expect safety without correspondingly low returns.
Asset allocation will always play a big role when determining your investment strategy. The right mix of assets for your investment portfolio will depend on your investment objectives. The longer you plan to stay invested the higher your allocation to growth-type investments, such as shares, may be. The shorter the time period, the higher your allocation towards defensive assets, such as fixed interest and cash, may be.
However you decide your asset allocation, remember to regularly monitor and update your strategy to account for any changes – both personally and from an investment perspective. Achieving the best performance for your investment portfolio is not a 'set and forget' thing. Re-balancing your portfolio over time may be necessary to keep your investments on target so that you can continue to achieve your goals.
This is where advice from a professional investment adviser will help you. Your Morgans adviser is best placed to help you renew your asset allocation to ensure your risk and return expectations are appropriately managed.
If you would like more information on investment diversification, asset allocation or risk management, feel free to contact your Morgans Adviser or your local Morgans office.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.