You have heard us talk about investment asset allocation or diversification, but we thought it might be a good idea to expand on that explanation to show you how it affects your investment portfolio.
You already know that asset allocation is spreading the money in your portfolio over a mix of the different investment types available, but what is the right mix and does “one size fit all?”
As with anything personal, your own financial portfolio must suit your specific needs – both now and in the future. So, with each of your objectives and timeframes in mind, the most important aspect to look at when determining your investment spread is risk.
There are three types of risk that must be considered:
1. General market risk – largely dependent upon economic conditions;
2. Market sector risk – a particular sector of the market, e.g. industrial vs resource stocks;
3. Specific risk – a particular share or property.
As you can see, each risk is affected by different factors, so the best way to manage all types of investment risk is to ensure that your portfolio is adequately diversified to cater for volatility and over-reactions. Put simply: when one goes down, another goes up.
Once the risk factors are taken into account, it’s time to look at the specific assets within the portfolio, investing across cash, fixed interest, Australian shares, international shares and property. All of which will provide something unique at the different points of the investment cycle.
Remember that the longer you plan to invest, the more important good diversification becomes. This further minimises risk and your growth potential is maximised.
We hope this explanation helps you to understand why we’re so focused on the right asset spread for you.
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If you have any questions about asset allocation or your personal portfolio, please contact our expert team of financial planners here at Leenane Templeton.