Investment portfolios and concentration risk
When it comes to investing, the main asset classes are cash, fixed interest, property, and shares. Importantly, each asset class (and sub-asset class) has its own unique characteristics (e.g. categorisation, focus, liquidity, expected rate of return, returns, risk level, and time horizon).
Moreover, no one asset or type of asset provides the best performance over all time periods-they tend to rise and fall at different times depending on economic, political and market factors. With this in mind, diversification, or spreading your risk, is a key risk management strategy used when constructing (and maintaining) an appropriate investment portfolio, whether it be inside or outside of super. In broad terms, diversification may be thought of as ‘not putting all your eggs in one basket’.
Diversification involves spreading your funds across asset classes, inclusive of a wide range of sectors, industries and geographical regions within each of these asset classes. This can help to, for example:
reduce the volatility of your overall investment portfolio returns
ensure that there is not a concentration heavily weighted in one area, which may help reduce the impact of a downturn in a particular market, industry, or region.
So why is diversification an important strategy? By applying diversification, you can potentially reduce the volatility of your overall investment portfolio returns and ensure there is not a concentration heavily weighted in one area. This may help reduce the impact of a downturn in a particular market, industry, or region.
When it comes to investing, it’s important to remember the fundamentals so you are invested appropriately-according to your financial situation, goals and objectives, now and in the future.
If you have any questions regarding this article or how you can diversify your portfolio, please contact us.