The Power of Diversification

You’ve heard the expression ‘Don’t put all of your eggs in one basket’. This is as true to your investments as it is for eggs.  Including different investment classes to a portfolio reduces risk through diversification. If the Australian stocks are down, the US stocks might be up (as is currently the case). If the US tech giants were to crash the Emerging Markets may have a good run. If the Australian dollar were to rise, we’d see the benefit in Hedged investments.

We commonly see limited investment/super portfolios, which are made up of only banks or top 20 Australian companies.  This is (unknowing to most) a risky strategy for their portfolio and is significantly impacting their returns.  As the below images show a portfolio can have 30% more in defensive assets but if it diversified across asset classes it can perform a lot better than an all growth Australian equity portfolio.

·       The Australian Banks index over the last 12 months: (-28.5%)

·       ASX 20 over last 12 months: (-6.4%)

·       A sample diversified portfolio over last 12 months: +3.4%

Traditionally Australian equities have been the popular and most trusted choice of Australians. These companies, however, make up a few small portion of investments of the world. As the Vanguard asset comparison table shows Australian shares has significantly underperformed international shares and property over the last 10 years. With the recent slashing of Australian dividends this may continue.

Conclusion: If you are only in Australian shares, you are at risk and missing out.

Figure 1 – 12mth performance of a Sample client’s portfolio (BT Panorama)

Figure 2 - 12mth performance of the Australian banks (investing.com)

Figure 3 - 10yr returns of major asset classes (Vanguard)