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Diversification to Reduce Risk and Volatility

One of the fundamentals of good financial planning is diversification. Even in a market like Perth, which remained somewhat insulated from the worst of the Global Financial Crisis, all segments and sectors are subject to ups and downs. When a portfolio is subject to the ups and downs of any particular market, the dynamic is referred to as “volatility.”

Diversification to Reduce Risk and Volatility

While most markets are subject to ups and downs, it is a rare occurrence when every single market goes down at the same time. In a diversified investment portfolio, the investor isn’t affected as badly by one particular market going down, because the others usually don’t. Occasionally, when one market falls, another rises.

Diversification can provide a form of protection for investors and usually allows them to wait for any particular market to go back up.

How it Works

The popular way to diversify is to invest across asset classes. Examples: cash, fixed-interest bonds or securities, properties, shares and precious metals. Each class has its own risk to reward profile. Those with low risk and low reward, such as cash, are the least volatile. Those with the highest risk and reward potential, such as shares, are considered to be the most volatile.

A financial planner who is providing diversity will recommend that you invest across many or all of these asset classes.

AMP Multi Asset Fund

Our parent company, AMP Financial Planning Pty Limited, has a multi-asset fund that would be classified as a diversified fund. It blends together most asset classes with the goal of producing more revenue at less risk. In other words, the returns are often higher than assets classes which carry low risk. Ideally, a multi-asset fund carries low risk but produces moderate reward.

At Approved Financial Planners, we provide financial planning services and can help you with investments across a variety of platforms. We work with you to determine your risk tolerance and work within your limits.

Call 08 6462 0888.