How does diversification help reduce risk?
Diversification is achieved by spreading your investment across different asset classes and investments in order to reduce risk.
Diversifying your investment across a broad range of asset classes may smooth returns while still providing the opportunity for capital growth. An easy way to achieve diversification is to invest in multi-sector managed investments, where you gain exposure to a range of securities in different asset classes. Your adviser will be able to recommend an investment strategy to suit your goals and risk tolerance.
The diversity of assets within a managed investment generally helps to reduce risk and produce more consistent returns than investing directly into a single asset. You should read the relevant PDS which must be provided by your adviser prior to placing any managed investment orders. Investing in listed securities may expose you to more risk than investing in managed investments because returns from single securities can fluctuate significantly over time.
To demonstrate how different asset classes perform, the following graph compares the value of a $10,000 investment in cash, Australian fixed interest, Australian listed property, Australian shares and international shares over the last 15 years. The graph also shows the value of the same investment in conservative, balanced and growth type investments over the period.
The next graph shows the highest and lowest annual returns(measured at the end of each month) for each investment over the same period.
The percentage of negative 12 month returns experienced over the past 15 years in different asset classes is shown below.
This graph has been prepared by MIML, based on indices we commonly use to measure the performance and risk of the relevant investment markets (over the past 15 years, 1 January 1996 to 31 December 2010). The reinvestment of dividends and/or income has been assumed. Past performance is no indication of future performance. The value of your investment can rise or fall.
The specific characteristics of Absolute Return investments, Hybrids and ASX listed securities prevent an analysis of a typical investment over the past 15 years.
Part A of the Avenue Retirement Service PDS