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Diversification: reducing risk or reducing returns?


For anyone who’s a regular reader of our newsletter and website articles, you’ll be familiar with our belief that it’s smart to have a diversified portfolio. As an investor, it’s important to manage your risk and having a diversified portfolio is one way to do that – after all, we’ve all heard the adage ‘don’t put all of your eggs into one basket’.

Diversification makes logical sense, but is it genuinely a way of reducing risk or does it simply reduce returns?

Well, you don’t need to look too far to see why portfolio diversification can assist in reducing risk and improving long term returns.

Here is a list of the top and worst performing asset classes over the last 10 years:

Fin Year Best Worst
2021 International shares International Bonds
2020 US shares Australian Listed Property
2019 Australian Listed Property Cash
2018 US shares Cash
2017 International shares Australian Listed Property
2016 Australian Listed Property International shares
2015 US shares Cash
2014 International shares Cash
2013 US shares Australian Bonds
2012 Australian Bonds Australian Shares

The variation in performance is clear to see – a top performer one year can be the worst performer the following year. Given the unpredictability, there are a few different options to consider when creating your investment strategy.

One is to simply appreciate that it is exceptionally difficult to pick which asset classes are going to perform best (or worst) in each year. Therefore, a long-term perspective is needed – and don’t try to pick year by year winners! Allocate investments across different asset classes – this will even out performance over the medium to long term.

Another option is to only allocate funds across one or two of these asset classes and try to pick next year’s winner. This might give you a better result if you happen to be good at it – however your risk level will increase markedly.

The third option is to use the first approach and diversify across asset classes – but don’t just leave these allocations static. With active management you could alter the weightings of your diversified portfolio to increase or decrease exposure to shares, property, bonds and cash.

We work closely with our investment clients to ensure they have the right investment strategy that’s aligned with their goals – a diversified portfolio is crucial to keeping on the right track.

If you’d like to discuss your investment strategy, contact the team at Crystal Wealth Partners who’ll be happy to talk through your options.

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