
Diversification in practice
by Wealth Know How in Managed Funds
In this video we discuss what Diversification means to you in practice. James Dunn explains the basic building blocks of establishing a diversified portfolio of investments that may include a small or large range of asset classes. There are many approaches to achieving your investment goals and terrific tools to assess your risk profile. The question is what is your appetite for risk?
- sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
Published on 17 Jan 14
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In this video we discuss what Diversification means to you in practice. James Dunn explains the basic building blocks of establishing a diversified portfolio of investments that may include a small or large range of asset classes. There are many approaches to achieving your investment goals and terrific tools to assess your risk profile. The question is what is your appetite for risk?
Sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
-
Venezuela tension heats up
Duration 03:16
-
Aussie dollar surprises market
Duration 03:10
-
Markets climb as investors watch US healthcare bill
Duration 02:31
To be properly diversified your investments have to be spread both within and across asset classes. For example, it isn’t wise to have the Australian shares portion of your portfolio invested in just bank stocks, because you're only exposed to banking – which can leave you vulnerable to things like changes in interest rates. Buying BHP or Telstra adds another industry to the mix thereby providing that diversification and a cushion against some market shocks.
Also, it may be best to have some international shares in your portfolio as well, to invest in companies and industries that you can't find in Australia, and spread your investments further. This may bring a currency risk into play, which could either help or hurt the final return, but some investors actually want exposure to currencies other than the A$ – they think of that as another layer of diversification.
How much you put in each asset class will depend on your appetite for risk and your stage of life. Risk is simply the other side of return. It’s a good idea to use a risk profile calculator to determine your investment risk profile: there are many websites on the internet that have these, for example:
Some asset classes are considered ‘defensive,’ because they’re less risky – for example, cash and bonds. But for the greater safety, they usually offer less return. Conversely, the so-called ‘growth’ assets, such as Australian and international shares, and property, are more volatile and risky in the short term, but provide the potential to grow your wealth over the long term.
So you also need to be diversified between ‘growth’ and ‘defensive,’ with the proportions depending on your appetite for risk and your stage of life.