Diversification: the key to success
In
the 2004 documentary Supersize Me, Morgan Spurlock eats food only from
McDonalds for a whole month. What was the result? He gained weight (a lot of
it), experienced mood swings, and frequent headaches.
“Like
your diet, your share portfolio generally suffers if you just choose one stock
and don’t mix it up”
Now
we all love the occasional Macca’s every now and again, but it’s probably safe
to say that you should mix it up and maintain a balanced diet. Our body stays
healthy that way.
Like
your diet, your share portfolio generally suffers if you just choose one stock
and don’t mix it up. Choosing different stock types to work together is one of
the most important things to keeping your portfolio healthy.
“By
spreading out your investments, you avoid putting your eggs in one basket. If
that basket breaks, you can’t have your omelette, that’s a risky situation”
For
eating we call it a balanced diet, for investing we call it Diversification.
This blog will tell you a little bit about diversification, how it works, and
how you can achieve it.
How
does diversification work?
Diversification
basically means spreading your money across a variety of different investment
types. Often these investments perform differently at different stages of the
business cycle, or have different correlation with each other.
By
spreading out your investments, you avoid putting your eggs in one basket. If
that basket breaks, you can’t have your omelette, that’s a risky situation.
For
example, take the example of stocks and bonds. During a bad period for the
stock market, we tend to see bonds perform better than stocks. If you had a
portfolio full of stocks and no bonds at this time, you’ve just missed out on
the action. By diversifying you can avoid big shocks to your portfolio.
But
it’s not just different asset classes that behave differently. Healthcare
stocks will perform differently to Oil stocks, Oil stocks may behave
differently to Tech stocks, Foreign Tech stocks may behave differently to
Australian ones. There’s many different investment types to diversify.
How
can you diversify?
ETFs
are a great start (What is an ETF?).
“When
you invest with Raiz, you diversify”
With
ETFs, you can spread out your investments over hundreds of different stocks.
There are ETFs for local stocks, foreign stocks, bonds, and much more.
When
you invest with Raiz, you diversify. Each of the 5 portfolios offered by Raiz
are diversified across 5 different ETFs, different countries, and asset
classes.
Our
portfolios were designed with diversification in mind, and to give the investor
the best expected return for the amount of risk they’re willing to take
on.
So
don’t have Macca’s for every meal, and sign-up to invest with Raiz today. For more information on Raiz fees, click here.
Important Information
The information on this website is general advice only. This means it does not consider any person’s investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the Raiz product.
The information in this website is confidential. It must not be reproduced, distributed or disclosed to any other person. The information is based on assumptions or market conditions which change without notice. This will impact the accuracy of the information.
Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz.
Past return performance of the Raiz product should not be relied on for deciding to invest in Raiz and is not a good predictor of future performance.
