Apr 22, 2018
Welcome to Finance & Fury.
I’m sure that everyone’s heard the saying, “playing it safe” before. And in any game, it’s generally a good idea. If you’re playing a game or participating in anything, you want to make sure you don’t get kicked out of the game too early. And that’s where diversification comes in with investments. Its about covering your butt to make sure you don’t get kicked out of the investment game or at a certain point where it’s actually really essential to have your investments. We’ll be running through today; why even bother, how to get it right (because that doesn’t mean just spreading the risk around, it actually means increasing your returns as well) and then practically, how you can achieve that.
Spread the risk
Best |
Worst |
Negative |
|
Cash |
1 |
7 |
0 |
Fixed Interest (Bonds) |
4 |
5 |
1 |
International Shares |
4 |
4 |
6 |
Listed Property |
5 |
3 |
3 |
Australian Shares |
6 |
1 |
4 |
Example
Water flowing down stream. Rocks stay in place regardless of the
direction of the water.
Salmon swim upstream against the current. The correlation between
those three elements is a complete mess. If you’re investments are
all over the place it’s really hard to get a targeted return.
Diversify! Focus on increase in value, not just returns
Let’s look at the second half of that trick question. 10.20%
average return.
25 years ago, you invested $10,000 into an investment with a
“growth” profile.
This would be worth $106,000 now! You made $6,000 more on an investment with a 1.20% lower average return.
You more you diversify, the more you have in investments – this shows progress
The process
How to determine what to invest in:
Just start!
How many investments:
Easy diversification
Having a diverse portfolio can be an expensive and timely to manage. Financial indices can help to solve this. A financial index is a measurement of the asset class (or market segment) it is representing.
Australian Share indices
ASX20 – Top 20 companies (by market cap)
ASX200 – Top 200 companies (by market cap)
ASX300 – Top 300 companies (by market cap)
All Ordinaries – Top 500 companies (by market cap)
An index is a cheap way to provide diversification as it captures many investments in one holding.
Risks of diversifying and where it goes wrong!
Summary - Diversifying is awesome
Finally, …thank you! The podcast has received tremendous support so thanks to you all. Great to hear all of your feedback and know I’m not talking to myself every week.
Questions and feedback, go to financeandfury.com.au/contact