When investing, diversification can be a very useful risk management tool even if you are comfortable with a high risk approach. The following explanation of diversification may help you devise the best investment strategy for you.
Diversification is a risk management technique that mixes a variety of investments within a portfolio. A portfolio of different kinds of investments should, on average, yield higher returns and pose a lower risk than exposure to any individual investment on its own.
Diversification strives to smooth out risk events in an investment portfolio so that the positive performance of some investments will neutralise the negative performance of others. Therefore, the benefits of diversification will hold only if the investments in the portfolio are not perfectly correlated (related).
Returns vary between investments, with higher risk investments generally offering higher returns in the long term (commonly called growth assets) and low risk investments providing smaller returns but greater stability (called defensive assets). Diversification means having a mix of growth and defensive assets in your portfolio – the defensive assets may produce steady low returns while the growth assets are likely to fluctuate more in the short term.
Investing in multiple assets spreads the risk and returns so that a loss in one may be balanced to some extent by gains in another.
All investments are subject to risk and will fluctuate with movements in financial markets, changing economic conditions and adjustments in interest rates and exchange rates. A downturn in any particular area is less likely to significantly impact on an entire portfolio if it is fully diversified. For instance, a drop in Australian mining shares may be offset by a value rise in Australian banking shares. Generally, a diversified portfolio will carry less risk that the weighted average of each investment’s individual risk.
The largest risk is to invest in only one asset or investment as fluctuations in value will have a significant impact on the returns to you.
How to diversify investments
An investment portfolio can be diversified within and across asset classes, by investing in different sectors and industries, by investing in different geographical locations (countries) and by using unique diverse investment managers who invest in a range of companies and strategies. AvSuper seeks to do this by grouping assets into sectors with characteristics of growth and defensive assets.
Within your super account, diversification also depends on your investment choices; the AvSuper pre-mixed options offer different levels of diversification and the specific asset class sectors (eg Cash, Australian Shares & International Shares) include much less diversification. Choosing more than one option increases your diversification.
To decide on how to diversify your portfolio (ie what proportion of growth and defensive assets you want), it is worth knowing your risk profile. A risk profile is simply an understanding of how you feel about risk, and it is likely to change over time. An AvSuper financial adviser can help you determine your risk profile by considering your age, retirement timeframe, investment objectives and level of savings.
AvSuper and diversification
Diversification can be an effective way to minimise risk when investing which helps to maintain constant returns despite fluctuations in specific markets and investments.
At AvSuper diversification is maintained by the Trustee choosing a variety of asset classes, investment managers and strategies, sectors and industries and countries to invest in. By managing a broad range of investments within each option, AvSuper minimises risk while aiming for the best returns.
Diversification within investment options
Within the pre-mixed options (Growth (MySuper), High Growth, Balanced Growth, Conservative Growth and Stable Growth), AvSuper deliberately invests with a long term focus and diversifies it among several investment managers in each asset class. This helps spread the risk of an investment manager under-performing at a particular time and allows us to take advantage of a various investment styles.
For the three specific asset class options (Australian Shares, International Shares and Cash), diversification is achieved by using a range of investment managers and investing across the spectrum of sectors and industries.
AvSuper Member Investment Choice enables you to choose one or a combination of our investment options. You can change how your super is invested in our options at any time; this is called switching and there are no AvSuper fees applicable.
Therefore, you can choose to diversify your savings across various options (for example, some money in Australian Shares for greater potential returns and some in the Growth (MySuper) and Stable Growth options for greater stability and diversification). Or you can choose a pre-mixed option and rely on AvSuper’s diversification strategies.
AvSuper members can access personalised advice – that takes into account your personal circumstances – about the various options available to you through your AvSuper account and more complex retirement planning advice*. AvSuper’s Member Advice Consultants are experienced, qualified financial advisers able to assist you with specific personal advice needs. No more referrals to external financial planners for simple advice matters! Call AvSuper now to ensure your super is appropriately diversified.
Email: email@example.com | Local call: 1300 128 751 | Phone: 02 6109 6888 | www.avsuper.com.au
This information is of a general nature only and does not take into account your personal objectives, situation or needs. Before making a decision about AvSuper, you should consider your own requirements and the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD). For a copy call us or visit the AvSuper website, www.avsuper.com.au. AvSuper Pty Ltd (ABN 46 050 431 797, AFSL 239078) is the Trustee of the AvSuper Fund (ABN 84 421 446 069). FS3000.5 02.2021