In the world of investing, few principles are as consistently emphasised—and as often misunderstood—as diversification.
At its simplest, diversification means spreading your money across a variety of investment types so you are not overly exposed to the performance of any single asset.
While it may sound like a basic concept, diversification plays a powerful role in managing risk, supporting long-term growth, and aligning your financial decisions with your personal tolerance for risk.
What Does Diversification Mean?
Diversification involves building an investment portfolio that includes different asset classes—such as shares, property, fixed interest, and cash—and, within those classes, a variety of sectors, industries, and geographic regions. The rationale is simple: when one investment performs poorly, others may perform well, reducing the overall impact on your portfolio.
It is often described as “not putting all your eggs in one basket,” but in practice it is more strategic than that. Effective diversification ensures that your portfolio is constructed to weather market ups and downs while still aiming for long-term growth.
Why Is It Important to Keep Diversification in Check?
Diversification isn’t a one-time task—it’s an ongoing process. Over time, investments grow at different rates. Shares may boom while fixed interest remains steady, or property may rise in value while global markets fall. This natural movement means your portfolio can drift out of alignment with your intended risk level.
For example, if your shares perform strongly over several years, they may begin to dominate your portfolio. While this growth is positive, it also exposes you to greater volatility than you originally planned. This is why periodic review and rebalancing is crucial. Maintaining the right mix of investments helps ensure your portfolio continues to reflect your goals, time horizon, and risk tolerance.
How Diversification Relates to Your Investment Profile and Risk Tolerance
Everyone has an investment profile, whether they realise it or not. This profile is a reflection of your financial goals, how long you intend to invest, and how comfortable you are with risk. Some investors prefer the stability of conservative investments, while others embrace higher volatility in pursuit of greater long-term returns.
Diversification works hand-in-hand with your risk tolerance. A conservative investor may diversify heavily within defensive assets such as government bonds, high-quality fixed interest, and cash, while still maintaining some exposure to growth assets. A more aggressive investor might spread their portfolio across Australian and international shares, emerging markets, and property. In both cases, diversification is used to balance the pursuit of returns with the management of risk.
A well-constructed diversified portfolio can help smooth out returns over time, reduce the impact of market swings, and improve the likelihood of meeting your long-term financial goals.
Why Taking Advice from a Financial Adviser Matters
While diversification is a powerful tool, getting it right can be complex. The optimal mix of investments varies from person to person, and it changes over time as your circumstances evolve. A licensed financial adviser can help you assess your risk tolerance, clarify your goals, and build a personalised investment strategy.
Advisers also play an important ongoing role—monitoring your portfolio, recommending adjustments, and helping you stay on track even during periods of market uncertainty. Their guidance can help you avoid emotional decision-making and ensure your diversification strategy remains aligned with your long-term objectives.
Top 5 Diversification Tips
- Spread your investments across multiple asset classes – Include a mix of growth and defensive investments to help balance risk and return.
- Diversify within each asset class – For example, invest in different sectors, industries, and regions rather than relying on one market or industry.
- Review and rebalance regularly – Markets move, and so does your portfolio. Schedule periodic reviews with your adviser to keep your mix aligned with your risk profile.
- Consider your investment timeframe – Longer time horizons typically allow for greater exposure to growth assets, while shorter timeframes may require more conservative choices.
- Seek professional guidance – A financial adviser can help tailor a strategy that reflects your goals, circumstances, and evolving risk tolerance.
If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.
This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.
(Feedsy Exclusive)