How Should An Investor Diversify A Portfolio?

  • Nov 18, 2018 AEDT
  • Team Kalkine
How Should An Investor Diversify A Portfolio?
  • Through investment across different asset classes: In order to diversify a portfolio, the investors should diversify across different asset classes (cash, fixed interest investments, equity, property etc.). Generally, an investment portfolio should have mix of investments, with some having the higher risk and return (growth assets) and some investments having a lower risk (defensive assets) and return, based on the appetite of an investor. The proportion of each type of asset will depend on the investment objective, age of the investor, investment time frame and the investor’s personal risk tolerance. Generally, the investor should keep some cash or very liquid investments aside to deal with the emergencies and near-term goals. Now if the investor is young and are in 20s, he/she should allocate 80% of the investments in stocks 20% in bonds.
  • Invest in different industries or sectors: It’s been seen that all the sectors do not give good returns all the time and some perform better than others in a given point of time. Further, different asset classes give different returns at times. There are sectors that are more volatile than other sectors and the ASX200 overall, like the materials and healthcare sectors. Some sectors are conservative in nature, some sector perform even if the market is overall weak etc.
  • Invest in different markets across the globe: All over the world, there is huge investment opportunities and Australia forms only small share of it. Therefore, investing in overseas market in global stocks will combat the fluctuations in a single market. However, investing in international markets, the investor will have to face the added risk, that are related to the fluctuations in currency exchange rates, their economy, their demand and supply which can increase or reduce the investment returns. The investor has an option of investing in overseas markets either directly or through an overseas share option in a managed fund, ETF or super fund. If the investor plans to invest in equities across the globe, for US market he can go for a multinational manufacturer like Procter & Gamble. If the investor is looking for consumer defensive sector, he can invest in General Mills. Among China stocks, the investor may invest in Great Wall Motor Co, which is the Middle Kingdom’s most profitable automotive original equipment manufacturer. In UK market, the investor may invest in Imperial Brands that has given good returns. In healthcare, the investor may buy Swiss giant Roche stock, which is in a unique position to give good returns.
  • Time frame: There is a risk called 'Timing risk', means you have not factored timing while diversifying your portfolio and due to it, there is a chance that the investments have suffered as the investor did not buy or exited the investments in correct time. The investor should make a buy or exit strategy of different investments and should stick to it.
  • SMSFs: If the investor has a self-managed super fund (SMSF), she/he will be responsible for making investment decisions for that fund. The fund's primary focus is on accumulating funds to live off in retirement. The investors have to themselves find how diversifying into this can help them.

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