Diversifying your investment portfolio is not about chasing the highest returns possible, but managing risk and reward to help provide more consistent and smooth returns over time.

Different assets will perform better at different times, and limiting a portfolio to one major asset class – whether it be cash, fixed interest, bonds, property or shares – can limit the potential returns and increase the risk of a negative return.

Keeping your investments within Australia alone can also restrict your returns, because the Australian share market lacks diversification and is heavily concentrated to financial stocks and resources. In recent years, since the recovery from the Global Financial Crisis commenced, overseas shares have performed significantly better than Australian stocks. Overseas markets can be accessed through options like managed funds or exchange traded funds.

Diversification does need to be considered in conjunction with an investor’s risk tolerance however. For example, a very conservative investor will likely still only have a small allocation, if any, to direct shares. In that case, diversification comes from spreading the risk in a reduced investment universe, and it’s paramount to select managers and investment styles that complement each other.

Self Managed Super Funds (SMSF’s) are at a heightened risk of being heavily concentrated in one area. Property is the common example, as direct property is not available in other types of super funds and some investors have a preference for property. SMSF’s need to also be careful they consider the investment strategy of the super fund when making investment decisions.

For more detailed financial planning advice tailored to your circumstances, please make an appointment with a member of TJL’s Financial Planning team.