Nutritionists tell us that we need to be eating a vast array of healthy foods, from lamb roast to a nice green salad. This, they say, gives our bodies the nutrients needed to perform at their best and protect them from the plagues of man. Sounds about right.
Economists tell us that we need to be investing in a vast array of assets, from blue chip stocks to oil. This, they say, gives our portfolios the risk-weighted returns needed to perform at their best and protect them from the vagaries of the market. Sounds good too.
So what should we be eating? From top down -
Asset Classes
These are the main classes of investable assets:
- Shares (Australian and International)
- Property (Australian and International)
- Alternatives
- Bonds (Australian and International)
- Cash
Class Sectors
Each asset class can generally be broken into further sectors or industries. For example, Australian share sectors include financials (banks, etc), materials (miners, etc) and consumer staples (supermarkets, etc). Bond sectors include Government bills, corporate bonds and junk bonds. Alternatives include hedge funds, commodities and currencies.
Individual Assets
Then within each sector lie the individual assets themselves e.g. BHP shares, an investment property, US 90 day T-bill, gold, etc. How to invest and how much to invest are the next important questions. DIversity would see us invest across all the asset classes and sectors. And like the food pyramid, there are probably some areas that we would want to be investing more into than others (go easy on the sweets…).
Due to the nature of a lot of these investments, size restrictions make it hard for most to invest at the individual asset level. Managed funds are useful in this regard, allowing us to invest at the sector or class levels, and trusting that experienced portfolio managers will invest at the individual asset level appropriately.
So whether you are more inclined to pick stocks and assets yourself, or use a fund manager to do that for you, the spreading of risk through diversifying your portfolio should play a key role in your quest for wealth growth. This can be a great way of gaining returns above what you would get from your typical high-yielding bank account, whilst not taking on unrewarded risk.