After reading my last post, you’re no doubt well aware of the importance of diversification in managing risk and enhancing returns in your investment portfolio. However, diversification goes beyond simply investing in different asset classes. In this article, we’ll explore the various diversification strategies available to investors in Australia and how they can be applied to achieve your investment goals.

One common diversification strategy is sector diversification, where you spread your investments across different sectors of the economy such as technology, healthcare, and finance. This reduces your exposure to any single industry’s performance and allows you to capture returns from multiple sectors. Another diversification strategy is market cap diversification, where you invest in companies of different sizes, such as small, medium, and large-cap companies, to reduce concentration risk and increase portfolio diversification.

Geographical diversification is also an essential diversification strategy. Australia accounts for barely 3% of the global market, so why have 100% of your funds invested here? Investing in different regions helps to spread your investment risk and allows you to capture returns from different economies. For example, investing in emerging markets like Asia and Africa can provide a diversification benefit by reducing your dependence on the performance of developed markets like the US and Europe.

Alternative investments are another way to diversify your portfolio. Examples include private equity, venture capital, hedge funds, and commodities. Alternative investments typically have low correlations with traditional asset classes and can provide valuable diversification benefits to your portfolio.

Incorporating diversification strategies into your investment portfolio can be challenging, but it can also be very rewarding. With the right diversification strategies, you can reduce risk and enhance returns in your investment portfolio.

One simple way of measuring broad diversification without having to hold hundreds or thousands of individual securities is through the use of funds as I’ve talked about in a previous article. ETFs and managed funds typically provide a level of inherent diversification and the right mix of funds can offer investors exposure to an extremely well-diversified mix of assets. 

In conclusion, diversification strategies go beyond investing in different asset classes. Investors can diversify across sectors, market cap, geography, and alternative investments. The right combination of diversification strategies can help to manage risk and enhance returns in your investment portfolio. As an Australian investor, you have many options available to diversify your portfolio, and it’s worth considering them to achieve your investment goals.

Remember, diversification is not a one-size-fits-all strategy. It’s essential to consider your investment goals, risk tolerance, and time horizon when designing your investment portfolio. Seek professional financial advice to help you develop a diversified investment strategy that’s right for you.