Smart investors understand the importance of diversification and the managing of risk. However while Self Managed Superannuation Funds (SMSF) trustees and retail investors might diversify their individual holdings, they are falling short when diversifying from a global standpoint. It’s very common to invest in what one knows which often means Australian stocks with familiar product and services. Home country bias, together with the lure of franked dividends, makes investing in Australian stocks a safe bet.
We have been taught that diversification is very important to a portfolio as it spreads investments around, whether that’s different asset classes, fixed income or buying a house. There are plenty of Australians who still have significant amounts of funds invested in Term Deposit and Savings Accounts. While these are safe options, Mr Harry Hindsight would look enviously at those who benefitted from the stock market having a record year in 2013.
That’s where diversified investment funds are important. They offer a full range of different asset classes to SMSF and retail investors with little upfront costs. They can be divided into 3 types of groups – balanced funds, growth funds and capital funds.
Balanced funds tend to be a mix of regular income securities and capital growth. These type of funds have around 70% of their allocation is assets like shares and property (growth stocks) and the remaining 30% in cash and fixed interest.
Growth funds focus primarily on growth stocks and a small portion of that in cash or income securities. It’s often advised you hold onto these types of securities for at least 5 years to allow for swings in the underlying asset.
Capital funds traditionally invest in fixed income securities and cash products like government bonds. These types of funds tend to be suited for investors looking for stable returns with low risk.
What's the right option for you?
Choosing the right fund for you will depend on your individual circumstances like age, risk appetite and your personal goals. With thousands of managed funds from which to choose, there are plenty of options available to investors to suit their personal needs.
Managed investment funds with international stock exposure are offered by many of our large financial institutions and they are a great way to diversify your Australian asset focused portfolio.
In the last 12 months offshore investing provided Australians with a 46% gain if you invested in US stocks. Alternatively, you could invest in Exchange Traded Funds (ETF’s) which are listed on the Australian Stock Exchange (ASX) and track an underlying index or portfolio like ‘US bank stocks’.
In a changing and unpredictable world, diversification is still critical to an individual portfolio to reduce risk and smooth out investment returns. Successful investing will require more attention on preserving capital and identifying assets strategies that truly diversify (including even international managed funds) that are less sensitive to domestic economic growth or volatility in particular asset classes or share price.
Find out more about Managed Investment Funds with RateCity's free Managed Investment Funds Guide.