The importance of diversification in 2016

Financial Planning

Every day investment analysts use their education, experience and knowledge to produce research, reports and recommendations on what they believe the market will do in the short to long term. However, despite their best intentions nobody has a crystal ball – predictions are often incorrect.

One fairly consistent theme emerging from most commentary in 2016 is that it will be a year of considerable volatility, with a dash of doom and gloom. Market commentators are predicting a year of uncertainty as most world economies grapple with slow economic growth and in some cases economic decline.

How do you limit volatility in your portfolio?

All portfolios will experience ups and downs over the years. Our approach is to ensure our clients have a portfolio that is well diversified across each asset class, invested in accordance with its purpose and contains a mix of asset classes that is appropriate for our client.

What can be controlled?

Asset Allocation

We believe any portfolio should correctly reflect both the owners tolerance to risk and the portfolios purpose.  Our focus is on ensuring our recommended portfolios are well balanced across each asset class and contain a diversified range of assets within those sectors. Adherence to asset allocation on an ongoing basis will continue to be the biggest determinant of long-term portfolio performance.

The below illustration outlines the most common types of assets held by a diversified portfolio:

Diversification Chart

Where volatility is a concern, or represents unnecessary risk within a portfolio, our approach aims to reduce that risk by spreading the value of the portfolio across a wide range of asset types.

While one or several asset classes can underperform in a given year, a well-diversified portfolio seeks to reduce the overall loss as other asset classes in the portfolio perform better. Likewise, where one asset class experiences volatility (i.e. emerging markets) another may offset that volatility with more consistent behaviour (i.e. cash and bonds).

Of course there are no guarantees when investing – our role is to control the aspects of a portfolio that can be controlled and ensure our clients are empowered and confident in making decisions about their financial future.

Simplicity

Overall, we don’t believe our clients need complex and expensive financial instruments, daily monitoring or constant trading. Nor do we believe this type of approach will necessarily result in better long-term returns. Our portfolio solutions have been designed with a long-term investment horizon in mind and our goal is to work with clients who value a long term relationship.

Investment Approach and Fees Payable

We believe that a core satellite approach assists in diversifying a portfolio and minimising costs.  This means that the ‘core’ of a portfolio is invested via index funds or ETF’s (Exchange Traded Funds) and the remainder is invested in actively managed funds.

This allows us to take advantage of an index style approach (low costs, diversification and lower volatility) while still providing potential for out-performance of the index with active managers. Our aim is to compliment the index with actively managed funds with a lesser correlation to the index.

If you’d like to talk further or would like further information please contact our team on 1300 925 081.

This article is intended to provide information only and is not intended as investment advice. It is provided as general information only and is not personal financial advice. You should not rely solely on this article to buy, sell or hold a particular investment. If you would like personalised financial advice please contact our team on 1300 925 081.

Jan, 27, 2016

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