The Real Benefits of Diversifying
Important information and general advice disclaimer
The information contained in this material is general in nature and has been prepared for educational and informational purposes only. It does not take into account your personal objectives, financial situation or needs and should not be regarded as personal financial advice.
Before making any financial or investment decision, you should consider whether the information is appropriate to your circumstances and, where appropriate, seek professional financial advice. Where a financial product is referred to, you should consider the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD), where applicable, before making a decision.
While reasonable care has been taken in preparing this material, information may change over time. Any taxation, superannuation, Centrelink or other legislative information is based on our understanding of the relevant rules at the time of publication and may be subject to change.
Tony Regan is an Authorised Representative (No. 243492) of Professional Investment Services pty ltd, Australian Financial Services License No. 234951.
DIVERSIFICATION BASICS
Why NOT putting all your eggs in one basket really matters
A practical guide to asset classes, risk profiles, portfolio reviews and sensible rebalancing.
When an investment, sector or asset class has performed strongly, it is natural to wonder whether more of your money should be invested there. However, successful long-term investing is rarely about predicting tomorrow’s winner.
A well-diversified portfolio spreads investments across asset classes, sectors, regions and individual investments. This reduces reliance on any single market outcome and helps create a portfolio suited to your objectives, timeframe and tolerance for risk.
Because different investments respond differently to changing conditions, weakness in one part of a portfolio may be partly offset by strength elsewhere. This can help smooth the investment journey over time, although diversification cannot eliminate risk or prevent losses.
Diversification isn't designed to ensure that every part of your portfolio performs well at the same time. If everything behaves in exactly the same way, you may not be as diversified as you think.
What does diversification actually mean?
Imagine investing all your money in the shares of one Australian company. If the business thrives, your investment may rise strongly. But if it encounters serious problems, a significant portion of your savings could be at risk.
Now consider the alternative: spreading your money across a broader mix of investments, including:
· hundreds of Australian and international companies;
· government and corporate bonds;
· property and infrastructure;
· different industries and geographic regions; and
· cash and other defensive investments.
This means your financial future is no longer dependent on a single investment. Diversification cannot remove risk, but it can help create a more resilient portfolio and give you greater confidence through changing market conditions.
THE DIVERSIFICATION TABLE
Australian Shares | International Shares | Property & Infrastructure |
Fixed Interest / Bond | Cash | Countries, Sectors & Companies |
The building blocks of a diversified portfolio
Most diversified portfolios combine growth assets and defensive assets in different proportions.
Cash Cash and term deposits generally provide stability and liquidity and can be useful for shorter-term expenditure. Their main limitation is lower long-term growth potential, while inflation can reduce purchasing power over time. Primary purpose: Stability, liquidity and capital preservation. |
Fixed interest and bonds These investments can include loans to governments and companies in return for interest payments. They normally play a defensive role, although bonds are not risk-free. Primary purpose: Income, diversification and moderating portfolio volatility. |
Property and infrastructure Exposure may be obtained through direct property, listed investments or managed funds. Values can fluctuate and listed investments may move with markets over shorter periods. Primary purpose: Income, longer-term capital growth and diversification. |
Australian shares Shares provide part ownership of a company and may deliver dividends and capital growth. Their values can fluctuate significantly, particularly over shorter periods. Primary purpose: Long-term capital growth and income. |
International shares International shares broaden exposure to different companies, sectors, economies and regions. They can also introduce currency risk. Primary purpose: Long-term growth and diversification beyond Australia. |
One portfolio does not suit everyoneDiversification isn't synonymous with being conservative. A portfolio can be highly diversified and still be very growth oriented. The difference is the asset allocation: how much is invested in growth assets relative to defensive assets. |
ILLUSTRATIVE RISK SPECTRUM |
Conservative | Moderate | Balanced | Growth | High Growth |
More defensive | Defensive + growth | More even blend | More growth | Predominantly growth |
Conservative
Greater emphasis on cash and fixed interest, with a smaller growth allocation.
May suit: Investors who are prepared to accept lower returns and prioritise capital stability, have shorter timeframes, or have a lower tolerance or capacity for substantial market movements.
Moderate
More growth exposure while retaining meaningful defensive assets.
May suit: Investors prepared to accept limited volatility in returns and are seeking some capital growth while keeping a substantial defensive component.
Balanced
A combination of growth and defensive assets, accepting more short-term movement for higher long-term growth potential.
May suit: Investors with a medium-to-long timeframe who are comfortable with a reasonable level of market volatility.
Growth
Greater emphasis on shares, property and other growth assets.
May suit: Longer-term investors who can tolerate more significant movements in portfolio value.
High Growth / Aggressive
Predominantly growth-oriented assets.
May suit: Investors with long horizons, a high tolerance and capacity for volatility, and the ability to withstand significant negative periods without needing to sell.
The better question is not “Which portfolio will give me the highest return?” It is “What combination gives me the right balance between the return I need and the risk I can reasonably afford to take and tolerate?”
Important: These profiles are illustrative only. Actual names, strategic asset allocations and risk assumptions vary between providers and advice frameworks.
Why doesn't everything perform well at the same time?
Australian shares may lead in one period, while international shares, bonds or another asset class may perform better in the next. In a diversified portfolio, some investments will almost always appear less exciting than others—and that difference is precisely what can help reduce reliance on any single market outcome.
Investment A | Up Down Up
 |
Investment B | Down Up Steady
 |
Investment C | Steady Up Down
 |
Investment D | Up Steady Up
 |
Combined thoughtfully..... | .....Creates A portfolio aligned with goals and risk tolerance |
Diversification is powerful because different investments respond differently to economic conditions, interest rates, inflation, company earnings, currencies and market sentiment. Combining investments with different responses can help reduce the impact of any one market event on the overall portfolio.
This relationship is often described as negative correlation: when one investment falls, another may hold steady or rise. Purposefully combining assets that behave differently can help smooth portfolio returns over time. The highs may be less pronounced, but the lows may also be less severe.
Diversification isn't ‘set and forget’
A diversified portfolio should evolve as your life evolves. Even a carefully constructed strategy needs regular review because markets, priorities and personal circumstances can change over time, including:
· investment markets and asset values;
· your age and investment timeframe;
· income, expenditure and liquidity needs;
· retirement plans and required portfolio income;
· your capacity or willingness to accept risk; and
· your financial goals and priorities.
An annual portfolio review is an opportunity to confirm that your investments remain suitable, appropriately structured and on track for your goals. A review may be needed sooner after a material change in your circumstances, financial position or objectives. Importantly, reviewing a portfolio does not mean changes must be made; sometimes the right decision is to leave it as it is.
When a portfolio drifts off course
Consider a portfolio established with 60% in growth assets and 40% in defensive assets. After a strong period for shares, the mix shifts to 70% growth and 30% defensive. The gains may be welcome, but the investor is now taking more risk than originally intended—without having consciously chosen to do so.
Stage | Growth assets | Defensive assets |
Original target | 60% | 40% |
After market movement | 70% | 30% |
After considered rebalancing | 60% | 40% |
Portfolio drift matters because the portfolio may no longer have the risk and return characteristics originally selected for the investor.
What is rebalancing?
Rebalancing means adjusting a portfolio towards its intended mix of investments. This may involve reducing an asset class that has grown above its target and adding to one that has fallen below it. Although this can feel counterintuitive, the aim is not to predict the market’s next move; it is to restore the level of risk originally chosen.
Rebalancing does not always require selling existing investments. New contributions, portfolio income or available cash can sometimes be directed towards underweight asset classes, helping move the portfolio closer to its target mix.
But don't rebalance just for the sake of it
Suppose a portfolio with a 60% growth and 40% defensive target shifts slightly to 61% and 39% after normal market movements. That small change does not automatically mean investments should be bought or sold; some movement around the target is expected.
Before making changes, it is important to consider the potential consequences and costs of trading, including:
· brokerage and transaction costs;
· managed-fund buy/sell spreads or other implementation costs;
· capital gains tax consequences outside tax-exempt environments;
· possible stamp duty or transfer costs for assets or transactions where these apply; and
· time out of the market during some transactions.
Correcting a small imbalance should provide enough benefit to justify the financial and tax consequences of trading. When ordinary market movements cause only a modest deviation, monitoring the portfolio may be more appropriate than acting immediately.
Good portfolio management is not about keeping every asset allocation perfectly aligned every day. It is about keeping the portfolio sufficiently aligned with the investor’s strategy and risk profile while avoiding unnecessary trading.
A simple example
As David and Sarah approach retirement, they want confidence that their investments can support both their near-term spending and their longer-term needs. Their diversified portfolio has therefore been designed to provide:
· liquidity for shorter-term expenditure;
· defensive investments to moderate volatility; and
· growth investments to help their capital support longer-term retirement needs.
After a strong period for shares, their growth allocation rises materially above its intended level. The gains are welcome, but David and Sarah now need to consider whether the additional risk still supports the retirement they are planning—or has moved beyond what they need and are comfortable taking.
The review is not about predicting whether shares will rise or fall next.It is about making sure the portfolio you hold today remains appropriate for the retirement you are planning tomorrow.
The bigger picture
Diversification helps build a more resilient financial future by reducing your reliance on any one company, market, country or type of investment. It cannot eliminate investment risk or guarantee a profit, but it can help ensure that no single outcome determines your progress.
GROWTH + INCOME + LIQUIDITY + STABILITY + RISK MANAGEMENT
A good portfolio should have a clear purpose, and that combination should continue to evolve as your life evolves.
IS YOUR PORTFOLIO STILL WORKING FOR YOU?
Markets change—and life does too. Your circumstances, priorities and goals may be different from when your portfolio was first established. A portfolio review can help you understand whether your investments remain appropriately diversified, aligned with your risk profile and suited to what matters to you now.
· Is your portfolio appropriately diversified?
· Has it drifted materially from its intended allocation?
· Is the level of risk still appropriate for your timeframe?
· Have your retirement plans, income needs or goals changed?
Let's make sure your investments are still working towards the life you want.
Contact Your Financial Guardians to arrange a complimentary portfolio review and discuss whether your current investment strategy remains appropriate for your circumstances and goals.
Important information
This article contains general information only and does not take into account your individual objectives, financial situation or needs. Investment values and returns can rise and fall, and past performance is not a reliable indicator of future performance. Before making investment decisions, consider whether the strategy is appropriate for your circumstances and obtain personal financial advice where appropriate. Tax consequences depend on individual circumstances.
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