We're often urged to not 'put all our eggs in one basket'. This advice sums up the perils of investing in a limited number of asset classes. Yet this is exactly what many investors do, often unwittingly.
Property investors, for instance, are often homeowners, meaning a significant proportion of their wealth is tied to the residential property market. If values cool, their personal wealth can take a blow in a way that mirrors market movements.
Diversification provides shelter from this type of impact because different asset classes don't always move in sync. In fact, they each typically behave quite differently at different times. We have witnessed a great example of this in recent years with cash-based assets delivering very low returns while residential property has seen excellent gains.
By diversifying your portfolio across a range of different investment classes, you can maximise your chances of good long-term returns and reduce your exposure to market highs and lows (also known as 'volatility'). All this minimises the level of risk in your portfolio.
But diversification isn't just about the value of the returns you earn. Diversifying can also give you a degree of protection against unexpected tax or legislative changes that may be pitched at a particular asset class.
When it comes to investing, none of us knows what the future holds. Don't gamble your financial wellbeing by relying on just one or two types of investments.
How you diversify will depend on your age, income, personal circumstances and attitude to risk. There is a world of choice when it
comes to the investments available to Australian investors: shares (both Australian and international), fixed interest investments, structured products and managed funds that invest across a range of markets or focus on a particular asset class.
Visit citbank.com.au/investments to see our range of investment solutions.
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