Home' Army News : May 9th 2013 Contents VOLUME SEVEN
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Army May 9, 2013
Market management: Managing the risk by spreading your investments
is one factor that will help ensure a diversified portfolio.
Photo by Cpl Nick Wiseman
Diversification is an essential
ingredient of all investment
portfolios. It's the key to
riding the ups and downs of
Diversification is all about manag-
ing the risk versus reward trade-off.
Spreading your risk across different
types of investments means you won't
suffer a big loss just because one sec-
tor is doing badly for a while.
Spread across asset classes
Start by spreading your investments
across the major asset classes -- cash,
fixed interest, bonds, property and
shares. How you split your money will
depend on your goals and risk toler-
ance and how much money you have.
Spread across industries
To manage the risk of one particu-
lar industry suffering a setback, invest
your money in shares and funds across
different industries. Different indus-
try sectors include financials, mining,
health care, consumer staples and utili-
Manage your risk
A balanced portfolio can include
some investments that have a high
degree of risk and reward, as well as
some investments that are less vola-
tile. How you balance your risk-reward
trade-off depends on your appetite for
Spread across fund managers
If you invest through managed
funds keep in mind that different fund
managers have different styles of
investing. Relying on one fund man-
ager for all your investments may be
placing too big a bet on that manager's
Spread across markets
Australia has only a relatively
small share of the world's investment
opportunities. Investing some money
overseas may help reduce the risk of
being in only one market. One way
to access foreign investments is via a
Spread your timing
Timing risk is the chance that your
investment will suffer because of when
you buy or sell. For example, you buy
an investment just before a big price
To reduce this risk, invest at regular
intervals, for example, every fortnight,
month or quarter. In this way, some-
times you will pay more, sometimes
less for your investments. The differ-
ences in price even out over time.
Similarly, you can reduce timing
risk by selling investments in stages.
Are you diversified?
If you want to know if you have a
truly diversified portfolio, ask yourself
these four questions.
Do you invest across several asset
Do you invest across at least three
Do you never invest more than 25
per cent of your total portfolio in
any one investment?
Do you have both growth and con-
If you answered yes to all of these
questions, you have a very well diver-
sified investment portfolio
If you answered yes to a couple of
these questions, you have a reasonably
well-balanced portfolio but could con-
sider diversifying more.
If you answered yes to one of these
questions, you should seriously think
about spreading your risk.
These questions are suited to peo-
ple with an established portfolio, but
the principles of diversification apply
to anyone who is investing, including
through your superannuation and even
if you're just starting out.
For more information see MoneySmart's pub-
lication Investing Between the Flags, available
Spreading the risk is the best way to manage an investment portfolio, as
ASIC chairman Greg Medcraft writes.
If you have a suggested topic for this
column, email ASIC at:
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