Diversification reduces Investment Risk
Investing without diversification is exposing yourself to unnecessary risk. Avoidable risks are holding too few securities, speculating on specific industry sectors or countries and following the predictions of others. These are risks that don’t provide a reliable reward.
By spreading your investments across different types of asset classes you can build a portfolio for all conditions. This is because while one asset class is performing poorly, another may be doing well. This is not to say diversification is complete protection, but it is insulation to reduce the volatility in your portfolio.
At FWP our clients’ portfolios are broadly diversified across asset classes such as shares, fixed interest, real estate and cash.
But the diversification doesn’t stop here. Shares, fixed interest and real estate are further diversified according to size and geography.
These aren’t a handful of direct investments in individual companies, bonds or real estate trusts. These are investments into funds which encompass thousands of companies and bond maturities.
An FWP portfolio may hold upwards of 5000 individual companies across Australia and the world. Your fortunes are never riding on the performance of one company, one sector, one country or one asset class.
After all, who can really predict what will happen next? This chart shows the highest and lowest returns from each asset class for the past 15 years – can you see any pattern?
At Foundation Wealth Planners we build diversified portfolios that are structured to capture returns and minimise risk.
Next: Asset Allocation…