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Investment diversification is a strategy that involves spreading your investments across different assets and asset classes. The goal is to reduce some of the risks associated with investing by avoiding over-concentration in any single company, industry or currency. Allocating funds amongst various assets aims to minimise the impact of individual asset performance on an overall portfolio.
The saying “don’t put all your eggs in one basket” perfectly captures the essence of diversification. If you place all your funds into a single investment, you can expose yourself to significant risk. If that investment performs poorly, your entire portfolio could suffer. Diversification on the other hand, helps cushion your investments from extreme market volatility and can provide a safety net during turbulent economic times.
MANAGING RISK
The primary advantage of diversification is its ability to reduce the overall risk of a portfolio. By spreading investments across multiple assets, the potential negative impact of a single asset’s decline is mitigated by the performance of other assets. Having investments with low correlation, means that if one investment underperforms, the overall impact on your portfolio is less severe.
Investment diversification may not only limit downside risk but may also have the potential to enhance overall returns. By including various assets in a portfolio, it could capture gains from different sectors and industries that experience growth over time. This balanced approach may help investors achieve more stable and consistent returns in the long run.
MANAGING MARKET VOLATILITY
Markets can be volatile, experiencing ups and downs due to economic factors, geopolitical events, or investor sentiment. A diversified portfolio can act as a shock absorber, buffering against sudden market shifts and providing peace of mind even in times of uncertainty. Diversifying an equity portfolio across a range of different industry sectors such as financials, retail, technology and healthcare may be the best defence in fluctuating markets.
AVOIDING HOME BIAS
We believe avoiding home bias investing is essential for maintaining a diversified and balanced investment portfolio. Home bias refers to the tendency of investors to allocate a significant portion of their investments to assets within their own country or region, for example, investing only in Australian assets and overlooking international opportunities. By diversifying across various regions and markets, investors can reduce the risks associated with being overly dependent on the performance of their home country’s economy. Taking a global perspective enables exposure to different industries, currencies, and economic cycles, potentially leading to higher returns and reducing the impact of local market fluctuations.
REBALANCE REGULARLY
Over time, the performance of assets may deviate due to market movements. Rebalancing a portfolio can help maintain the desired level of diversification, reducing the risk of becoming overexposed to any single asset. This helps to prevent the portfolio becoming too concentrated in one area and can minimise potential losses during market downturns.
We believe investment diversification is a cornerstone of investing. By spreading your investments across different assets and asset classes, you may reduce risk, maximise returns, and navigate market volatility more effectively. Implementing a well-diversified portfolio tailored to your specific goals and risk tolerance can pave the way for a more secure and comfortable financial future.
While diversification is not a guarantee against losses, it may offer a robust approach to enhancing your chances of success in investing.
Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 (‘Magellan’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.
Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain ‘forward-looking statements’. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.
This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.
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