Diversification is a portfolio strategy designed to spread risk by allocating assets among a variety of investments. By creating a diversified portfolio, investors are able to minimise certain types of risk.
Three investment diversification strategies can be used to manage risk:
1. Diversify across asset classes
Diversification can be achieved by adopting an investment portfolio asset allocation that combines multiple asset classes, including international and Australian shares, property, fixed interest securities and cash.
2. Diversify within asset classes
By utilising a diversification strategy of investing in different asset classes, it is possible to reduce the risk of concentrations in any one market sector, individual company or country. By varying investments, the risk to an investment portfolio if a particular company, sector or country doesn’t perform well will be minimised.
3. Diversify across different equity styles
Different investment style funds and securities, including value and growth style funds, will increase portfolio diversification, ensuring that the risks associated with strategies that perform better or worse in certain markets will be minimised.
Portfolio diversification through managed funds
Investing in managed funds provides a level of diversification that many investors would not otherwise be able to achieve.
Managed investments pool unitholders’ money, and depending on the strategy of the fund, hold investments across asset classes, companies, industries, sectors, countries and
fund managers.