Making wise investment decisions can be a difficult task. There are a number of steps involved: you decide how much money you can afford to invest, select a suitable time frame for your investment, and then, in conjunction with your financial planner, decide on an investment product which suits your needs. Also, before making your decision, you’ll have considered the level of investment risk with which you’re comfortable.

One of the best ways to reduce investment risk, while increasing your chance of a better return on your money over time, is to diversify your investments. Diversification means investing your money in a variety of different market sectors or asset classes.

Investment diversification works on the principle that different asset classes perform well at different times. Research shows that each major asset class has, at some time over the past 12 years, been a top performer for one year. However, no asset class has been able to achieve this distinction over two consecutive years (see Table 1).

Strangely enough, on three occasions, the worst performing asset class in one year turned around to become the best performing asset class the following year.

Prevailing economic conditions can impact each of the four main investment types - shares, property, fixed interest and cash - in different ways. At any one time, one investment type will perform better than others. However, knowing which investment type will outperform during a particular period is the difficult part.

By spreading your investments across different asset classes, you avoid the ‘what if’ questions. ‘What if I’m in the wrong market?’; ‘What if I’m investing in this market at the wrong time?’; ‘What if I could get a better return by investing elsewhere?’. Neglecting to diversify your investments can mean exposing your savings unnecessarily to higher levels of investment risk.

Investing across different fund managers is another way to diversify your investments and reduce the level of risk to which you’re exposed. As various fund managers use different methods or ‘styles’ of investing, this will affect their investment decisions and the types of stocks they select. For example, a manager who uses one particular approach to investing may perform well at the beginning of an economic upswing, whilst another manager may perform better during an economic downturn. By investing with different fund managers and across various asset classes, you can further reduce levels of investment risk and increase your chance of producing more consistent returns over time.

Achieving truly diversified investments can be a difficult task for an individual investor. However, certain investment arrangements exist which can help you ensure your investments are diversified regardless of how much you’re investing.

It’s possible to diversify your investments by placing your money in managed investments. A managed investment pools your savings with that of other investors to form an investment fund. As a small part of this large fund, you’re harnessing the buying power of potentially millions of dollars. You can access a broader range of investment opportunities, such as international shares and commercial and residential property, which would be difficult to access on your own.

A managed investment also allows you to maintain a diversified portfolio without the administrative responsibilities normally associated with having a broad spread of investments.

Investment diversification means spreading your funds globally, across all investment categories and with different fund managers. Not only can diversification reduce the level of risk involved with your investments, but it can balance weak performance in one particular asset class with good performance in another.

If you’re concerned about the diversification of your investments, you may need to seek professional assistance to alter your investment spread to suit your personal circumstances and needs. We can help you weigh-up your investment time-frame, your approach to investment risk, and your financial needs, arriving at an investment decision that will help your money grow over time without compromising your financial security.