The volatility of financial markets over recent weeks has grabbed front page media attention and I am pretty confident that it will have grabbed the focus of most investors as they consider the impact on their portfolios. What hasn't received so much attention is how diversification has served investors over this time. Investors with a diversified portfolio containing exposure to all of the major growth assets - Australian shares, international shares and listed property along with defensive assets such as fixed interest and cash, will have had a significantly better outcome than if they had invested solely in the Australian sharemarket.
To provide an example of the impact of diversification lets take a look at the results of a simple diversified portfolio with 65% of its value invested in growth assets. Our normal approach to developing such a portfolio would be to be slightly overweight in Australian shares compared to international shares and property. It would look something like the portfolio presented in the table that follows. Returns are for the quarter to date i.e. from 1st July.
|
|
% of portfolio |
Quarter to Date
Return |
|
Dimensional Australian Large Company Trust |
25% |
-0.90% |
|
Dimensional Global Large Company Trust |
20% |
0.08% |
|
Vanguard Property Securities Index Fund |
20% |
-0.61% |
|
Dimensional Fixed Interest |
35% |
0.49% |
|
Total Portfolio |
|
-0.94% |
The major point to note is that the overall portfolio has fallen 1.42% over the quarter. If you had been invested in only Australian shares your portfolio would have fallen a further 2.67%, down 3.61% over the same period. (Dimensional's Australian Large Company Trust is a proxy for the returns of the largest 100 shares on the Australian sharemarket, less fees.)
This provides a pretty powerful example of the importance of diversification!!
Regards,
Scott Keefer
