What is a Diversified Portfolio?

A diversified portfolio invests in each of the major asset classes, in proportions that suit the risk & return profile of the investor. The major asset classes are shares, property, fixed interest and cash. A well diversified portfolio usually invests in a number of securities in each asset class, directly and/or via managed funds, and may invest in Australia and overseas.

What is the benefit of investing in a diversified portfolio?

A diversified portfolio reduces investment risk in two main ways:

•  Investment in a broad range of securities lessens the impact on a portfolio of one security failing.

•  Investment across the major asset classes tends to smooth the overall portfolio returns, because while one asset class is in a downturn other asset classes should be performing well.

The best of both worlds

A diversified portfolio gives you access to the potentially higher returns from quality shares and property, combined with the security of fixed interest and cash. So, over the long term, the result from a diversified portfolio should be as shown below.

T1 .1

This can be seen in Chart 1 which compares the volatility and long term returns of shares versus cash versus a broadly diversified portfolio. As you can see, the latter has generated higher returns than cash with less volatility than shares.

C1.1

Case study

Let’s say you had $100,000 to invest on 1 January 1982.

Chart 2 shows how much wealth you may have created by investing in certain assets by January 2016, assuming income was re-invested.

C2.2

As you can see, if you had invested your money into term deposits, it would have grown to $961,427.

But if you had invested in a diversified portfolio[1], you would have $3,636,923. It’s a $2,675,496 improvement.

Now let’s assume you retired at the start of 2016. What would be your investment income position?

Your diversified portfolio would be generating an income of something like $147,555 this year (based on last year’s income). On this, you and your spouse could expect to pay tax of $9,188 (as shown in Table 1).

T2

Compare that to the $30,766 net income you would receive from term deposits this year (based on last year’s income).

These graphs are for illustrative purposes only. Past performance is not an indicator of future performance.

Disclaimer: This article is not legal advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is a registered tax (financial) adviser. Any views expressed are those of the author and do not represent the views of Australian Unity Personal Financial Services Ltd. If you intend to rely on any tax advice in this document you should seek advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in March 2016. © Copyright 2016