How do I get the right mix in my portfolio?

Getting the right mix in a portfolio is about diversifying to help protect your investments from market volatility and reduces risk.

Use diversification as a strategy to help reduce investment risk by spreading your investments across:

• Asset classes
• Markets
• Investment funds

Diversification looks at your portfolio as a whole, with the aim of balancing losses in one investment against gains in another.

The benefits of diversifying

By holding a diversified portfolio, you may not equal the top return for any given year, but nor should you equal the lowest.

The more ways you diversify, the more likely you are to reduce your risk.

For example, you can diversify within asset classes in addition to investing across different classes.

You may also choose to diversify:

• Inside or outside of superannuation
• By holding more than one investment within each type of asset class. For example, investing in several different industries and companies when selecting shares
• By holding more than one type of fund or using more than one fund manager when investing in exchange traded or managed funds.

Look to overseas markets

Investing overseas will also help diversify your portfolio by lessening your portfolio’s dependency on just one market. You will gain exposure to the economies of other countries which may perform well, when Australia is not, and you could benefit from exchange rates fluctuations.

Understanding asset classes

Most investments fit into one of four main asset classes:

• Cash (e.g. money in the bank or a term deposit)
• Fixed Interest (e.g. government or corporate bonds)
• Property (e.g. Real Estate Investment Trusts or direct property)
• Shares (e.g. companies listed on the ASX or Exchange Traded Funds).

These four asset classes can be separated into two broad groups: Defensive and Growth investments.

Defensive investments

Cash and Fixed Interest are defensive investments which aim to provide steady income with stable returns.

Defensive investments have less risk but do not usually grow in capital value.

Returns are generally lower than growth investments over the medium to long term.

Growth investments

Property and shares are growth investments which can provide income, as well as an increase in capital value.

While returns may fluctuate over the short term, growth investments have the potential to produce higher returns than defensive investments over the medium to long term.