Anyone who is thinking of making changes to their financial plan over the coming months might want to think carefully about diversifying their investments – but what are the benefits of doing so?
There are various different ways of investing in Australia and some people believe that having cash in a number of places will bring advantages.
In some respects, diversifying investments helps lower the risk of losing capital – it can be seen as a means of hedging one’s bets and minimising risk.
For example, if one investment performs especially poorly, there is an opportunity for others to perform better. As a result, your losses are lowered over time.
Having some safer assets can help give your investments stability at times when the markets are more volatile.
The important thing to remember is that it is not possible to entirely eliminate risk, but rather you can make decisions that help you manage it.
Younger investors can usually afford to take greater liberties as they have long-term strategies to follow, whereas older people may choose to be more cautious with their money.
Ways of diversifying your investments
One of the more common ways of diversifying investments is to place them across a number of different asset classes – you might choose to put your money in cash, international shares and Australian property, for example.
It is also possible to diversify within asset classes – you may decide to purchase shares across a number of industries.
If you are investing in managed funds then it is possible to use a variety of different fund managers, or even branch out into a range of investment structures.
Preserve your capital
Should your financial plan centre round capital preservation, then diversifying investments can be a worthwhile move.
This enables you to protect your capital and allocate money to a host of investments – this can reduce the impact that outside forces have on your assets.
Deciding on your level of diversification
There are different levels of diversification, so the key to deciding which is right for you is to ask yourself what your objectives are.
Considerations include how long you intend to invest for and the level of risk you are willing to take.
ipac is one of Australia’s largest financial advisory firms and has offices based across the country. A wholly-owned subsidiary of the AMP Group, ipac specialises in research and financial advice that helps clients lead happier, more fulfilling lives.