Investment diversification is important in the best of times, but when you’re in the middle of a global pandemic that has seen the world’s largest economies shut down, it’s more critical than ever.
Why is diversification important?
While all asset classes are affected during a market shock like COVID-19, investors can shield themselves from critical losses through diversifying their portfolios, because it is unlikely that all investment types will experience the same falls at the same time.
Diversification is defined as selecting a wide range of assets or investments within a portfolio. In other words, not putting all of your eggs in one basket. It’s a way of managing risk across your entire portfolio of investments and ensuring you are not over-exposed to a single class or category of asset.
Why is diversification important?
While all asset classes are affected during a market shock like COVID-19, investors can shield themselves from critical losses through diversifying their portfolios, because it is unlikely that all investment types will experience the same falls at the same time.
Diversification is defined as selecting a wide range of assets or investments within a portfolio. In other words, not putting all of your eggs in one basket. It’s a way of managing risk across your entire portfolio of investments and ensuring you are not over-exposed to a single class or category of asset.
Types of assets
In Australia, shares and property are the most common investment types. A 2017 ASX investor study reported that 37% of all Australians own either an investment property, or invest in shares.
Other common investments include term deposits (cash) and fixed interest bonds issued by governments or companies.
It’s important to note that not all investments are created equal.
They all carry different levels of risk and offer substantially different levels of return. Higher risk investments like shares or property offer higher returns compared to lower risk investments like term deposits.
Diversifying across different asset types
Gains are never guaranteed in the world of investing, however there are a number of decisions investors can make when building their portfolio.
To build a resilient and crisis-weathering portfolio, investors should ideally invest across several different asset types.
If you invest in property, this might mean not just buying properties in a single location (e.g. Melbourne vs Sydney, city vs regional), or across a single asset class (e.g. houses vs apartments, residential vs commercial) but employing a mixture of diverse assets across your portfolio.
If you invest in shares, it might mean diversifying across sector (e.g. energy vs consumer discretionary), market (e.g. ASX vs NASDAQ) or market cap (e.g. startups vs large conglomerates).
For example DomaCom use the latest technology and equity (share) market concepts such as Separately Managed Accounts and Multi-level Managed Investment Schemes, to enable investors to get into the property market in a similar manner to investing in public companies.
Property investing is such a phenomenon in Australia that it’s even been described as a ‘national sport,’ and it’s our mission to offer a strong and diversified portfolio to every aspiring property investor in the nation.
In a Managed Investment Scheme like DomaCom’s Fund, they allow investors to pool together in a syndicate like structure to invest in specific properties through crowdfunding, where investors then own ‘fractions’ of different properties.
This ‘fractional’ model enables investors to create a diversified property portfolio and avoid the exposure of a single asset investment.
Investors can purchase between 1% – 100% of units in a property sub-fund and can achieve diversification across property type, rental yield and capital growth, thereby lowering investment risk and enhancing potential returns.
For example, if an investor has $100K to invest into property then the traditional method would be to borrow $400K and purchase one $500K apartment. Using the fractional model, the investor could take the same $100K and invest $20K into five different properties, thereby diversifying by location and property type.
It is much less likely that all five properties will be vacant at the same time or have the same market valuation issues, and this is a key benefit to diversification.
Investing during a crisis
If you are thinking of expanding your investment portfolio, or even starting to invest for the first time, you have the benefit of being strategic about diversification from the beginning.
Even though we find ourselves in unchartered territory due to COVID-19, there are always smart investment opportunities to be found if you know where to look.
Whilst COVID-19 is increasing the risks for investing in general, there will always be segments that will perform well in this environment. For example, some ASX stocks such as JB Hifi, Harvey Norman and Wesfarmers have benefited hugely from this pandemic, and it will remain to be seen if the experts are right about city dwellers moving to regional areas in their droves, thereby pushing up regional property prices.
When it comes to diversifying your portfolio always do your research. Speak to a professional, have a plan, and then, stick to it. COVID-19 may have changed the world as know it, but markets always bounce back.
While downturns are a certainty, investors can ride out uncertain periods through diversifying their assets and preparing for the next upswing.
Because just like during a global crisis, we need to be ready to ride the wave when the opportunity strikes. And, if you hold a diversified portfolio, you will not only be more protected, but better able to ride it when it comes.