Diversification is a big word for a strategy used to manage investment risk. The goal of diversification is to minimise the impact of a poor investment to your overall investment returns.
Finance nerds and professional investors use numerous complex mathematical formulas to work out optimal investment portfolios that maximise diversification and minimise risk. Let’s use a simple example to show how these work.
Raincoats or sunscreen
Imagine there are only two companies in the world. One sells sunscreen and the other rain coats. If you invested all your money in the company selling sunscreen you would do well during summer, but not sell anything when it was cold and rainy. Alternatively, if you invested everything in raincoats, summer would see very few raincoat sales.
Of course, it would be better to do well during both during summer and winter, so being a smart cookie you invest 50% in sunscreen and 50% in raincoats. This is diversification. It minimises the risk of poor returns and smooths out your investment performance.
Super is a diversified investment
Superannuation funds, whether growth, balanced or capital stable investments, are diversified by professional investors. You don’t need to create diversification by investing in multiple super funds. This doesn't reduce risk, it just increases your fees.
Equally, you don’t need to find super funds that invest in commercial property, or international technology shares such as Apple or Amazon. Your super fund likely already has property and technology shares as part of their investment diversification strategy.
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General advice disclaimer
This is general information only and does not take into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for you having regard to your objectives, financial situation and needs and consider obtaining independent professional advice before making an investment decision. If information relates to a specific financial product you should obtain a copy of the product disclosure statement for that product and consider that statement before make a decision whether to acquire the product.