Building a sound investment portfolio requires more than selecting winners—it requires diversifying between a variety of asset classes. For Australian investors, risk diversification requires more than savings accounts and regard for a mix of local and international possibilities.
Diversification protects your money from market volatility and prepares you for long-term growth. Below are five investment avenues that will help you develop a diversified portfolio that is best suited for the Australian economy.
1. Australian Equities: Your Home Base
Australian shares are a staple of domestic portfolios, providing high dividend yields, frequently above offshore figures. The ASX also provides exposure to sector groups like mining, banking, and health—sectors that traditionally have performed well through a downturn.
Consider exchange-traded funds (ETFs) listed on the ASX 200 for exposure to the broader market, or to individual sectors best suited to your risk tolerance. There are also favourable franking credits on Australian shares to add significantly to your after-tax return.
2. Global Equities: See Beyond Borders
International diversification reduces the exposure to the performance of the Australian economy and opens doors to the growth opportunities of emerging and developed economies. US markets expose investors to technology leaders and growth companies for which there are no equivalents in the local market.
Foreign ETFs are an inexpensive means of investing in foreign economies without the inconvenience of foreign stock investing. Invest 20-40% of your equity allocation in foreign economies, dividing developed economies and emerging economies based on your risk appetite.
3. Rental Property: Tangible Returns
Direct property investment remains widely favoured by Australians, still offering rental yields and potential future capital appreciation. Investment housing is favourably taxed under negative gearing and inflation-proofing but requires active management and substantial amounts of capital input. Thankfully, industry leaders BNB Butler and the like can help you manage your property.
Location matters—invest in the right properties that enjoy good rental demand, infrastructure development, and increasing population. Keep in mind that property investing entails ongoing long-term expenses like maintenance, insurance, and property management charges.
4. Real Estate Investment Trusts: Ownership Without the Aggravation
REITs allow investors to invest in property without the hassle of direct ownership. The trusts hold and operate income-generating real estate, from shopping centres to office buildings, and pass on most profit to shareholders as dividends.
REITs provide predictable income flows and expert property management. They are also more liquid than direct property investment and can be bought and sold in the same way as shares. REITs can be used to complement direct c or as your whole real estate exposure.
5. Alternative Investments: Beyond the Traditional Assets
Alternative investments, commodities, and hedge funds also help stabilise a portfolio in turbulent markets. Precious metals and gold do well in economic slowdowns, and one can gain exposure to agricultural commodity and energy markets through commodity ETFs.
Private equity funds and hedge funds have higher minimum investment requirements but uncorrelated returns with the general markets. More available to most investors for these asset classes are commodity ETFs and alternative investment platforms.
Constructing Your Diversified Future
Creating a long-term portfolio is all about finding a balance between risk and growth potential in diverse classes of assets. Start from your time horizon and risk tolerance, and invest in these five categories based on your financial goals.
Regular portfolio reviews guarantee your investments stay on track with your objectives as conditions in the market change. You may also want to hire a financial professional to develop a tailored plan that maximises your diversification advantage without unnecessary complexity.
