Why does it matter?
Here's the problem in downplaying investment risks
Here are five approaches to keep your portfolio downside risk low
1. Diversify your asset classes
Many say they’re diversified and indeed if you own more than 1 position, you are diversified to a limited degree. But sufficient diversification relies upon much more than simply adding another correlated Australian stock or equity fund.
Commonly understood by diversified managers is the concept of diversifying into different asset classes. However, diversification for its own sake in a static way is suboptimal and valuation needs to be considered. Government bonds are an obvious option that is still heavily used. They offer potential diversification benefits in some environments and were attractive historically, but currently offer inadequate yields and may ultimately become more of a trading asset than a long-term hold. Other asset classes worth considering selectively include commodities, precious metals, and selective corporate bonds including hybrids. Cash is also an obvious option albeit one with inadequate returns today that is best used only for shorter-term needs. It is also becoming difficult currently to find value in quality corporate debt.
Many Australians are already overweight property and are hence advised to preference managers that minimise or exclude property (and even the leveraged property plays like banks). Equity subsegments offer some potential for modest diversification and even potential upside (e.g. especially if you can find a superannuation fund willing to pay up with others’ money for an asset like Sydney Airport, so they can delist the asset!)