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For a smoother path to investment success, diversify

The word diversification crops up in many contexts. You might hear a business person talk about diversifying revenue streams, or a footy fan mention a team’s need to assemble a group of players with diverse skills.

   

 

In a variety of arenas, people agree that diversification can improve chances for success. Investors are no different. In a recent survey of nearly 2,000 self-managed super fund investors, about 76 per cent agreed that it is important for their SMSFs to be diversified across different investment types. Yet only 39 per cent say their portfolio is very well or well-diversified.*

That’s not especially surprising. Closing the gap between theory and reality is always a challenge. Just as it’s easy to promise yourself to eat healthily but still sit down to steak, chips and ice cream too often, it’s easy to agree on the wisdom of diversification but not be certain that your portfolio achieves that goal.

Diversification protects against the risk that a share, bond or asset class will fall in value and generate losses that will prove difficult to recover from. Today’s soaring tech share could be tomorrow’s bankruptcy. By expanding the number and type of shares and bonds you own, you increase the odds that parts of your portfolio will hold their value when others fall.

A diversified portfolio is divided among asset classes such as shares, bonds and cash to achieve investors’ required returns within the limits of their risk tolerance. This formula will vary depending on an individual investor’s age, risk tolerance, time horizon and goals.

As you examine your investments, keep these diversification concepts in mind:

  • Your asset allocation, the way you divide your portfolio between different asset classes, is one of the biggest drivers of long-term performance. In other words, the specific shares or bonds you choose matter less than how much of your portfolio you devote to each of those asset classes.
     
  • Bonds are a crucial way to diversify against the risk of the share market. A portfolio invested 100 per cent in shares generated an annualised average return of 10.5 per cent over 80 years, according to Vanguard research**, but lost more than 40 per cent in its worst year. In contrast, a portfolio divided evenly between shares and bonds returned 8.3 percent on average per year, but lost only about 20 per cent in its worst year.
     
  • Investors should diversify both across and within asset classes. Once you have decided how much to put in each asset class, you should figure out how much to put into subsets of those asset classes. A diverse share portfolio, for example, should include allocations to small, medium and large companies and include international shares. 
     
  • Remember to examine your entire portfolio. If you have multiple super, or other investment accounts, consider them as a whole.
     
  • Once you have chosen an asset allocation, the ups and downs of financial markets may throw it off course. Remember to rebalance to your initial allocations to stay on course or choose a fund that does this for you.

*2019 Vanguard/Investment Trends SMSF Report
**Vanguard Portfolio Construction for Taxable Investors

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
13 August 2019
Vanguardinvestments.com.au

 


David Forrest Download David's Adviser Profile

David Forrest

Director
BEc (Acc), MBA, CPA, FFin

David has been in the Financial Services Industry for nearly 30 years. He was one of the founding Directors of the successful Financial Planning and Stockbroking Practice, Henderson Gregory Forrest, for a decade. Prior to that, he held senior roles in companies such as ING, KPMG Accountants and AMP. David was previously Chairman of OAMPS Superannuation Trustee Board and currently serves as an independent Board Director for several companies.

David’s extensive experience in all forms of superannuation, including Self Managed Super Funds (SMSF), Defined Benefit Funds, retirement funding through Account Based Pensions, stockbroking with a focus on Direct Share Investment, Taxation/Remuneration Planning, Centrelink, Aged Care and business management, equip him to advise expertly on all aspects of Financial Advice.

Those with a particular interest in superannuation/SMSFs, direct share investment, salary packaging or applying for the Centrelink Pension will find his knowledge and ability in formulating and implementing creative, logical and simple wealth creation strategies a valuable asset.

David maintains a strong personalised client service focus, providing tailored solutions for clients.

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David Forrest is an Authorised Representative of Integrity Financial (SA) Pty Ltd ABN 16 133 921 187 — AFSL No 334846

Michelle Forrest

Michelle Forrest

Business Finance Manager
B Bus (Acc), CPA

Michelle’s career has spanned across the Financial Services, Retirement Living and Aged Care industries working in the private sector, not for profit and more recently with the state government for over 20 years. Her experience extends to many facets of the financial services industry, having worked in superannuation administration, technical support and financial planning practice administration.

Commencing with AMP and subsequently working in commerce and accounting roles with companies such as Brambles, Adelaide Bank Retirement Services, ECH Inc and SA Health and Wellbeing, Michelle returns to financial services after working in practice financial management at Henderson Gregory Forrest. This wide range of experience from senior accounting and management roles has provided Michelle with a strong background in business administration.

With an astute financial acumen and keen interest in business improvement strategies, Michelle ensures the smooth running of the Integrity Financial Advisory practice providing valued management support to our personalised client service focus.

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Darren Chalk Download Darren's Adviser Profile
Natasha Bartlett
Kelly Collins
Jasmine Smith

Jasmine Smith

Client Service Manager

Jasmine has worked in the financial services industry for over 12 years in all areas of client administration, working with David since 2013.

Jasmine has extensive knowledge and experience in client service including implementation of advice, portfolio reporting, assisting with the establishment of Self Managed Super Funds (SMSFs), term deposit management and a long history of helping clients with their enquiries.

Jasmine’s attention to detail, yet gentle approach, means she is able to solve the trickiest of questions for our client community.

Jasmine has gained her Certificate III in Financial Services qualification.

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Merrilyn Smith

Merrilyn Smith

Senior Client Service Manager

Merrilyn has worked in the financial services industry for over 11 years in all areas of client administration, and is a new addition to our client services team, returning from Melbourne to join the team in June 2019.

Merrilyn has extensive knowledge and experience in client service including implementation of advice, managed fund administration, assisting with the establishment of Self Managed Super Funds (SMSFs) and process improvement for the previous practices she has worked with. Merrilyn’s experience with direct shares constitutes the other part of our administrative support for direct equity investments.

Merrilyn’s warm and caring nature continues to endear her to our clients and she has already established herself as a valued member of our team.

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