It is almost impossible to predict how the financial markets will perform - if we could predict sudden corrections in the share market or changes in the value of the Australian dollar we'd all be millionaires. 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. Some more than others.
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.
Let's say you had all your money in just one investment and that investment didn't perform - you would make a loss. But, if you spread your money across different types of investments you may have a better chance of including some investments that will perform.