If I was 25 again I would ... be wary of investment fads.
Today it’s crypto-currencies like Bitcoin. In 2000 it was technology shares. In 1987 it was shares in general, and way back in the seventeenth century investors were going nuts over tulip bulbs.
When it comes to investment, fads occur when asset prices are driven up by irrational excitement, greed, and ‘FOMO’ - the fear of missing out. The fundamental rules of valuing an investment fly out the window and speculation dominates trading as hoards get caught up in the frenzy before experiencing a crash.
While it may be difficult to resist the temptation to join in I would, instead, put my money only into investments that I understand; those with values based on a more realistic capability of generating long-term income and/or capital growth. I wouldn’t rule out the occasional small flutter on a ‘speckie’, but it would come out of my entertainment budget rather than being part of my core portfolio.
So that being said, what should you do? Here are some benefits of investment diversification and simple ways to achieve this in your portfolio.
When it comes to financial management, no single investment will continually outperform all other investments all of the time. To minimise potential losses and to smooth your investment returns over the longer term, you should spread your portfolio across various investments. But that can be easier said than done so there are different ways to diversify.
Diversify Across Asset Classes
Asset classes are the broad categories of investments and include equities, fixed interest, property and cash investments. Equities include both Australian and international shares. Fixed interest includes government, semi-government and corporate bonds. Property includes residential, retail and commercial properties. Cash includes term deposits and at-call cash accounts.
Lower risk asset classes, including fixed interest and cash, protect your capital during adverse market conditions. On the other hand, higher risk assets, such as Australian and international shares, can deliver good returns during the boom times. Holding a mix of asset classes may help to provide more stable returns over the medium to longer term as markets rise and fall.
Diversify Within Asset Classes
This could mean spreading your share portfolio across different industry sectors because certain sectors may outperform others over a given period according to economic conditions.
Two good examples are mining and manufacturing. The Australian resources industry helped keep Australia’s economy a shining light against a gloomy international backdrop following the Global Financial Crisis. Manufacturing, on the other hand, struggles with high labour costs making Australia less competitive against low income countries such as China. Nobody knows what the future holds - both of these industries are facing volatile conditions a few short years later - so a balance across industries is crucial.
It Can Be Simple
Even with a relatively modest amount to invest and very little time, you can achieve a balanced portfolio with the right mix of investments.
Managed funds offer easy access to a wide range of investments. By investing in a managed fund, professional fund managers select individual investments for you. In addition, most managed funds offer several different options to cater for varied levels of investment risk.
Other options include purchasing shares in Listed Investment Companies (LICs) and Exchange Traded Funds (ETFs) on the stock exchange. Depending on its charter, a LIC holds shares in a wide range of companies, while ETFs invest across all stocks making up a particular index, such as the S&P/ASX 200. Buying shares in an ETF or LIC gives you exposure to all the stocks held by the fund.
If you have some questions or would like to know more talk to us about the best ways to manage your investment risk and build your wealth.
Note: past performance is not an indicator of future results.