New to investing? Get smart and diversify

The risk of not diversifying

November 07, 2018 New to investing? Get smart and diversify

Life’s full of risks. That’s a given. Some you can mitigate against, some you can’t.

 

When it comes to investing, one of the critical ways of minimising risk is diversification. It can save you a lot of stress, particularly if you’re prone to money worries keeping you awake at night. In fact, I’d argue that a diversified portfolio should play a vital role within any long-term investment strategy.

By diversifying your portfolio, you’re looking to maximise your return by investing in various stocks, financial instruments, industries and even countries that will, in theory, react differently to a particular event. Like the Global Financial Crisis, for example. In saying that, you’ll never completely eliminate risk from your portfolio, no matter how diversified it is. Risk is just part of the equation. Ultimately, it’s about minimising that risk and reducing your exposure to market volatility.

 

If you’re looking to diversify your portfolio or start building a diversified portfolio, here’s what you need to consider at a very high level…

investment philosophy

 

Allocation

You’re effectively looking to ensure your investment funds are split across multiple asset classes. It’s about striking that delicate balance between risk and reward. Me personally, I like to split across shares, property, cash and fixed-asset securities.

 

Industries

Next up, you should be thinking about balancing your share investments across a variety of industry sectors. In other words, stuffing your portfolio full of companies in one industry or market’s probably not the best idea. The key thing to remember here is that companies within the same industry will likely share the same inherent risks, which is precisely what you should be looking to avoid.

 

Risk profiles

In theory, the more risk you can bear, the more options you have when it comes to investing, with more of your portfolio going to growth assets and less to conservative assets. I always aim to get the mix right across both so that we get the best of growth during positive market runs and we have some defensive assets to protect against falling markets.

 

Geography

In layman’s terms, you want to make sure your assets are spread across different geographic areas to avoid the peaks and valleys of a single economic region.If you are ‘overweight’ or ‘underweight’ in a particular economic region you might be more or less exposed to regional volatility.

 

Broader risks

Speaking more broadly, also look at asset-specific risks and market-specific risks. Asset-specific risks come with the actual investments or companies themselves and tend to relate to a company’s products/services, the stock’s price or management’s performance. Market-specific risks, on the other hand, tend to relate more to interest rates or factors such as geopolitics (e.g. changes to the government) and nature events (e.g. drought or disasters), for example, which affect whether investor sentiment is bullish or bearish.

 

Still, have questions? Feel free to give me a shout to arrange a coffee, or drop me a line and I’ll flick you through our Investment Philosophy, which will give you both a broader understanding of our approach to investing and includes an in-depth case study on diversifying risk.

 

Of course, if you are ready to take action today you can book in a chat directly with me below.

Disclaimer: all information contained within this article is of a general nature. It does not take into consideration your personal financial circumstances. Please consult a professional financial adviser (just like us 🙂 ) when making a financial decision.

 

Jason Chew
jason@orangewealth.com.au

I've been in the financial services industry for 10+ years and love coaching people to make the most of what they have.

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