How do I get the right mix of shares?

With more than 2,000 companies listed on the Australian Securities Exchange there’s no shortage of choice when buying shares. However, it’s vital to consider not only the credentials of each individual company but also how they relate to others that you’re investing in.

You might decide to prioritise finding shares that you think are going to rise in value in the future due to the company’s perceived ability to grow its earnings, or continue paying regular dividends, for example.

While these are desirable outcomes they’re not assured for any company, so finding the right mix of companies can help reduce the risk of losses in your overall portfolio.

 

Ways to diversify

There are various ways to categorise Australian shares, such as:

  • Size - small caps, mid caps and large caps
  • Sector – e.g. energy, financials, telecoms or IT
  • Factors that influence sector performance – cyclical or defensive.

Getting a mix of these different share types can help spread risk.

One way to diversify is to invest in a variety of sectors. You can never truly know which sector will perform best in any given time period. By investing in varied sectors, you can spread your risk as their performance is impacted by different factors.

If you invested only in companies within the telecoms sector based on the fact that they had delivered the best returns over the past three years, you could lose money if the sector had a subsequent downturn in fortune, impacting all of the companies in your portfolio.

 

What influences sector performance

There are many factors that influence individual companies and their share price so within each sector some companies will perform better than others. But it’s still useful to consider what can impact a sector and whether the sectors that companies sit within are considered as ‘cyclical’ or ‘defensive’, for example.

Cyclical sectors, such as property and retail, tend to move in sync with the wider economy, while defensive sectors, like telecoms and healthcare, can perform better than others when the broader economy is struggling as the state of the economy has less influence on the demand for the goods and services they produce.

It’s good to think about what would happen in a range of scenarios – a change of government, a slowdown in economic growth, a natural disaster, a global oil shortage – and consider how your investments would be affected.

 

Other ways to diversify

While there is plenty of variation in terms of the performance of companies listed on the ASX, they are all affected in some way by the Australian economy.

That's why investing in international shares can add even more diversification to your portfolio as foreign economies are affected by different factors.

Meanwhile, exchange traded funds provide exposure to whole sectors, countries or regions and can reduce the impact that individual companies have on your overall investment performance.

Back to Choosing Investments

Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. This information is not advice and has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives, financial or taxation situation and needs, and, if necessary, seek appropriate professional advice. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia. 

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© Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited, a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.

The information on this page has been prepared without taking into account your objectives, financial situation or needs. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to their objectives, financial situation or needs, and, if necessary, seek appropriate professional advice.

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