Diversification is an investment strategy that lowers your portfolio’s risk and helps you get more stable returns.

You diversify by investing your money across different asset classes — such as shares, property, bonds and private equity. Then you diversify across the different options within each asset class. For example, if you buy shares, you buy across a range of different sectors such as financials, resources, healthcare and energy. You can also diversify by investing your money across different fund managers and product issuers.

Diversification lowers your portfolio’s risk because different asset classes do well at different times. If one business or sector fails or performs badly, you won’t lose all your money. Having a variety of investments with different risks will balance out the overall risk of a portfolio.

It’s worth taking the time to review your investments and look for opportunities to diversify.

How diversification benefits you

Diversification is your best defence against a single investment failing or one asset class performing poorly (for example, the share market falling or one fund manager failing).

If you diversify your investments, when some fall in value, others may rise and balance out the fall. Diversification lowers your portfolio risk because, no matter what the economy does, some investments are likely to benefit. For example, when interest rates fall, bond prices rise, while shares generally do poorly at this time.

How to diversify

To diversify well you need to invest across different asset classes and within different options in an asset class. You can also diversify by investing in different fund managers or product issuers.

Review your investments

List all of your investments and what they’re worth. This could include:

• cash in a savings account
• shares
• managed funds
• an investment property
• your home
• your super

This will show you which asset classes you’re investing in and where you could diversify.

Identify gaps and research other asset classes

If most of your money is in one or two asset classes, research other asset classes. For example, if you own a house, an investment property won’t help you diversify. If property prices fall, you won’t have any other investments to balance out the fall. To diversify, you could invest in different asset classes such as shares or bonds.

Then within each asset class, make sure your money is invested across the different options available. For example, if you’re mainly invested in one sector such as financials, you should research other sectors such as mining, materials, health care, capital goods and commercial and professional services.

The way your super fund invests is a good example of diversification. Check your fund’s website or annual statement to see how they invest.

Invest overseas

Australia has a small share of the world’s investment opportunities. Investing some of your money overseas will lower the risk of investing in a single market. For example, investments in Asian and European markets may perform well when the Australian markets falls.

If you invest overseas you’ll be exposed to exchange rate risk.

Invest through a managed fund, managed account, ETF or LIC

A simple way to diversify is to invest through a managed fund, managed account, exhcange-traded fund (ETF) or listed investment company (LIC).

Managed funds and managed accounts

Managed funds and managed accounts can help you invest across a range of asset classes. Some managed funds and managed accounts offer pre-made diversified portfolios. These usually have the labels of conservative, growth or high growth depending on their asset allocation.

ETFs and LICs

ETFs and LICs provide a low cost way to invest in an asset class or diversify within an asset class.

Most ETFs in Australia are passive funds. These track an asset price or market index, such as the ASX200 or S&P500.

Most LICs are actively managed funds and invest in one asset class, such as Australian shares or private equity.

Keep your investments diversified

Over time, some of your investments will rise in value and others will fall. This means you could have more money in one asset class than when you started investing. You could also be less diversified. For example, if your shares go up and your bonds fall in price, you’ll have a greater portion of money invested in shares. As shares are higher risk, your portfolio will also be higher risk. If you’re not comfortable with this risk, it’s time to re balance.

How to rebalance

You can rebalance your portfolio by:

• Investing some extra money, such as a tax refund, in an investment you want more exposure to.
• Selling some investments and putting your money in other types of investments.

Selling investments will lead to a capital gain or a capital loss.

Get help with diversification

Finding the right investments can be challenging. If you’d like some help to build a diversified portfolio, talk to us.

Source:
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/how-to-invest/diversification
Important note: This provides general information and hasn’t taken your circumstances into account.  It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.  Past performance is not a reliable guide to future returns.
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Australia is a giving country, but we often give in kind rather than financially. If you are considering giving money there are several ways to do so.

Many ways to give

There are many ways of being philanthropic such as small one-off donations, regular small amounts to say, sponsor a child, donating to a crowd funding platform or joining a giving circle.

For those with much larger sums to distribute, a structured giving plan can be one approach.

Structured giving

You can choose a number of ways to establish a structured giving plan including through a public or private ancillary fund (PAF), a private testamentary charitable trust or giving circles.

Whichever way you choose, there are attractive tax incentives to encourage the practice.

The type of vehicle will depend on:

• the timeframe of your giving
• the level of engagement you want
• whether you want to raise donations from the public
• whether you want to give in your lifetime or as a bequest
• whether you want to involve your family to create a family legacy.

Private ancillary fund

A private ancillary fund is a standalone charitable trust for business, families and individuals. It requires a corporate trustee and a specific investment strategy. Once you have donated, contributions are irrevocable and cannot be returned. To be tax deductible, the cause you are supporting must be a body identified as a Deductible Gift Recipient by the Australian Tax Office.

The benefits of a PAF are that contributions are fully deductible, and the deductions can be spread over five years. The assets of the fund are exempt from income tax.

The minimum initial contribution to a PAF is at least $20,000. The costs of setting up a PAF are minimal and ongoing costs are usually about 1-2% of the value of the fund.

Each year you must distribute 5% of the net value of the fund to the designated charity.

Testamentary charitable trust

An alternative to a PAF is a testamentary charitable trust, which usually comes into being after the death of the founder. The governing document is either a trust deed or a Will.

With a testamentary charitable trust, trustees control all the governance, compliance, investment and giving strategies of the trust. The assets of the trust are income tax exempt. The minimum initial contribution for such a fund is usually $500,000 to $2 million.vi

Philanthropy through structured giving still has a long way to go in Australia. The latest figures for total giving in Australia is $13.1 billion, of which $2.4 billion is structured giving. Currently the number of structured giving entities stands at just over 5400.

As the baby boomers pass on their wealth to their families, there is a wide opening for some of this money to find their way into charities and causes through structured giving.

If you want to know more about structured giving and what is the right vehicle for you to help the Australian community at large, then give us a call to discuss.

Residential property investors have been on a wild ride in recent years as prices slumped during the pandemic and then quickly skyrocketed before losing ground again.

Now, with prices leveling out or slowly increasing, there is good news around the corner, according to some analysts.

A combination of positive indicators for housing could help to fuel further price rises.

With a widespread view that the Reserve Bank’s interest rate increases are beginning to work to ease spending, some believe we may see the first-rate cuts as early as next March. Add to that the increase in migration and the fall in new house construction, and residential property gains may follow. CBA Chief Economist Stephen Halmarick is forecasting a 7% rise in house prices this year and another 5% in 2024 claiming that, by this time next year, prices will return to “all-time record highs”.

The sustained levels of high demand clashing with historically low levels of for-sale listings are also pushing prices up, according to the Property Investment Professionals of Australia (PIPA).

In the meantime, some investors are doing it tough with rising interest rates and the end of fixed interest rate mortgages is sometimes a contributing factor. The number of short-term property resales made at a loss has jumped, according to property analysts CoreLogic, from 2.7% a year ago to 9.7% in the June quarter this year. The median loss was $30,000, for houses sold within two years, compared to a median profit of $75,000.

PIPA’s annual survey to gauge property investor sentiment found just over 12% of investors sold at least one investment property in the past year. Less than a quarter of those houses sold went to other investors, continuing a trend that has been happening for several years.

Almost half of those who sold said they were concerned about governments increasing or threatening to increase taxes, duties and levies.

Where are rents headed?

Will rents continue to rise or stabilise? Experts’ views are mixed about the short-term outlook for the rental market.

The Reserve Bank says the continuing shortage of rental housing is likely to support ongoing increases in rents.

The rents paid by new tenants provide a good indication of price movements in rental housing. Actual rents paid by new tenants increased by 14% over the year to February 2023. Since the onset of the pandemic in 2020, rents paid by new tenants have increased by 24%.

The Reserve Bank says rents for apartments with new tenants have been more volatile than for houses and townhouses over the past couple of years.

Rents for apartments with new tenants fell sharply during the pandemic and remained below pre-pandemic levels until early 2022 but rose 24% over the year to February 2023, whereas the overall index increased by 14%. By contrast, rent for houses and townhouses with new tenants increased by around 10% over the year to February 2023.

But CoreLogic predicts a slowing in rental price growth next year, saying rents rose for the 35th month in a row in July but monthly growth has eased over the past four months. It says the expected drop in interest rates next year combined with softer income growth and stretched rental affordability will contribute to a slowing in rents.

First homebuyers falling

The recent boom in property prices, the positive outlook and the many assistance programs available from federal and state governments have not been helping those looking to get into the market.

The number of first homebuyers has fallen significantly over the past 30 years, a new study has found. Published by the Australian Housing and Urban Research Institute, the study says the drop in first homebuyers is down to delayed partnering, higher rates of educational attainment and associated debt, the precarious nature of employment and worsening housing affordability.

The study says various government policy decisions have had little effect on the numbers of first homebuyers.

Build-to-rent growth

Australia’s growing build-to-rent (BTR) market is getting a boost from governments eager to increase housing stock. Various state governments have introduced a raft of incentives for build-to-rent projects, mostly in the form of tax concessions.

BTR projects, common in Europe and North American, see landlords build a large-scale residential development intending to hold it for the long-term while renting the apartments for longer-than-usual terms, often as long as three years with rent increases locked in. Rents are often slightly higher than market averages in return for better communal amenities such as roof gardens and gyms.

Institutional investors, such as super funds, are also getting onboard with the projects, favouring the steady income stream.

While Australia’s BTR market is mostly being driven by large developers and global players, smaller private investors are also getting in on the act. On the plus side, BTR offers regular income, often better returns and the chance to minimise expenses, not to mention the government tax concessions.

On the downside, there is the possibility the BTR concept might not take off in Australia and that vacancy rates may be higher as a result. There is also a downside to the promise of regular income – locked in rental increases may not keep pace with rapid market changes.