Diversify to keep investments safe

SIX out of 10 Australians own investments outside of the family home and super – and that’s good news.

The only problem is many people are still putting all their eggs in one basket, or just a few.

In the latest investor study by the Australian Securities Exchange (ASX), 40% of investors admitted they didn’t have a diversified portfolio.

Almost one in two investors thinks their portfolio is diverse, yet they hold, on average, fewer than three different investment products.

Diversification plays a key role in long-term investing.

The strategy of spreading your money so you have a little in a broad number of investments, not a lot in one, can strengthen long-term returns and minimise losses.

However, a wealth of research shows diversification is a weak spot for many investors.

The ASX found we tend to stick to cash, property and Australian shares. In addition to concentrating risk, this can mean missing out on decent returns earned by other asset classes.

As a guide, a recent ASX/Russell report found residential property topped the league table of returns for mainstream investments over the past 10 years, averaging gains of 8.1% annually.

What’s surprising is that over the same period, global bonds (hedged) and Australian bonds were the next best performing investments with average annual returns of 7.4% and 6.1% respectively.

Aussie shares didn’t even make the top four, earning an average of 4.3% annually over the past decade (though to be fair, this period includes the global downturn when share markets tanked).

Cash delivered woeful returns of just 2.8% annually over the 10-year period.

It’s a compelling argument to consider expanding your portfolio beyond the mainstays of cash, bricks and mortar and local shares.

Investments such as bonds, infrastructure (which incidentally returned 13.3% globally over the past year), or international shares (10.6%) can be good additions to a portfolio.

These types of investments can be difficult to access as an individual investor, but a managed investment fund – either listed or unlisted – offers an easy way to expand your portfolio into new areas and reap the rewards of diversification.

There’s a plenty of freely available information about a range of different investments.

Two good starting points are the MoneySmart website, or head to the Australian Securities Exchange website at www.asx.com.au.