Asset Class Diversification

By investing across different asset classes, the good performance of one class can offset the underperformance of another class, to provide smoother and more consistent returns.

What is the key benefit of investing in different asset classes?

Diversification – Lowering of Risk and Consistency of Performance

By investing across different asset classes, the good performance of one class can offset the underperformance of another class, to provide smoother and more consistent returns. This is known as diversification and is best encapsulated in the common-sense phrase ‘don’t put all your eggs in one basket’.

The benefits of diversification will vary over different time periods. Historically in some periods when there have been extreme adverse market events (e.g. the Global Financial Crisis), the effectiveness of diversification has reduced. Diversification should therefore be measured over medium to long term periods.

Features of a Balanced Fund?

A diversified portfolio can generally be divided into four types – conservative, balanced, growth and high growth. Conservative funds are the more defensive funds with a high exposure to fixed interest and cash. On the other hand, high growth funds are more aggressive with a high exposure to international and Australian shares.

A balanced fund will typically have a higher exposure to growth assets (Australian and International shares, Real Estate Investment Trusts [REITs], Alternative assets, Infrastruc- ture and Direct property) of 60% to 80% and lower exposure to defensive assets (Austra- lian and International Fixed Interest – Bonds/Credit/Hybrids and Cash) of 40% to 20%.

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