Does diversification help reduce risk?

It is almost impossible to predict how the financial markets will perform. But diversifying your investments can help you take advantage of the 'ups' while moderating the 'downs'.

Managed funds are a great way to diversify
Managed funds can reduce risk by spreading your money across a number of investments including asset classes, companies, industries, sectors, countries and fund managers.

What is diversification?
Simply put, diversification is not putting all your eggs in one basket. Or not putting all your money into just one type of investment. All investments are subject to some level of risk

How can diversification help reduce investment risk?
Different types of investments perform better under different market conditions. By investing in more than one type of investment you diversify, which can help reduce the risk for your overall investment portfolio. The more ways you diversify the more likely you are to reduce your risk. For example, across:

  • different asset classes (cash, fixed interest, property, shares)
  • more than one investment in each asset class (eg several different industries and companies when investing in shares)
  • more than one type of fund and investment manager when investing in managed funds.

If you spread your money across different types of investments, you may have a better chance of including some investments that will perform.

What to consider next

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This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 30 June 2015. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.