Escaping the investment rut

Whether you’re a long–term investor or just starting out, it can be easy to fall into an investment rut. With all the things going on in our lives, keeping track of the market and researching investments can feel like one more project we just don’t have time for.

Because it’s often easier not to think about it, we’ll stash our money in the same investment month after month, or, in our bank account.

However, the sense of security that comes from using a limited investment strategy can be a false one. By not diversifying your investment portfolio you may be more susceptible to fluctuations from individual types of investments, which could impact the return of your investment portfolio over time.

Why diversify

How many times have we heard of someone who put all of his or her savings into ‘the next big thing’ only to have that particular business or industry take a hit, and their hard–earned money along with it?

Since most of us don’t have the financial savvy of Warren Buffet, diversification is important as it can help to protect us from the unnecessary risk that can come from investing in too narrow of an area of the market. Since historically no single asset class performs best in all economic climates, you may wish to consider a variety of assets to help offset market volatility.

Diversification generally involves investing across different industries and asset classes, including stocks, bonds, cash equivalents, real estate and commodities. These investment vehicles often perform differently under the same market conditions. For example, historically when stocks go down, bonds often go up, and vice versa.

Don’t be afraid to ask for help

Contrary to popular belief, it’s not hard to become a smart investor. What you do invest in, however, will very much depend on your time horizon and your tolerance for risk. In general, the longer your investment time horizon, the more risk – and hence returns – you can assume.

If you don’t want to go it alone, a good financial adviser can help you decide the best class of assets for you, whether it be stocks, mutual funds and bonds for long–term growth, or cash equivalents to help you achieve shorter–term financial goals such as saving for a house.

Keep in mind that investing will always come with certain risks, so even having a diversified investment strategy will never entirely eliminate risk or guarantee success. However, diversification historically has offered potentially higher returns over the long run while reducing risk exposure.

This article is based on a post that first appeared on the CommBank blog.

Disclaimer

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 24 January 2013. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. Historical performance is not an indication of future performance.

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