Most investors know that keeping all your eggs in one basket, or all your money in just one stock is an extremely risky way to invest.
Diversification across a number of stocks is therefore the way to go, and ideally most investors would also be diversified across asset classes, with investments in cash, fixed income and property thrown into the mix.
Ever wondered why that's a common suggestion?
The idea is so that a single event doesn't destroy your portfolio. If you have all or a large portion of your funds in the big four Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC), a recession or property downturn is going to hit your portfolio hard.
Likewise, having all your funds in property companies or A-REITS as they are known, could also be hit hard if there's a downturn in residential, commercial and industrial real estate.
Theoretically then, an ideal portfolio would have no major exposure to any one asset class and investments across several. That could include cash, Australian and international bonds (or fixed income), Australian and international shares, infrastructure, real property or indirect property – replicating a balanced fund – such as Australian Super's Balanced Fund.
| Asset Class | Fund weighting | Target band |
| Australian shares | 31% | 20–45% |
| International shares | 31% | 10–40% |
| Direct property | 9% | 0–30% |
| Infrastructure | 13% | 0–30% |
| Private equity | 3% | 0–10% |
| Fixed interest | 10% | 0–25% |
| Cash | 3% | 0–15% |
Source: AustralianSuper
Interestingly enough, investors could go close to replicating the balanced fund through securities traded on the ASX and simple financial products. And by that I mean using Exchange Traded Funds (ETFs), Listed Investment companies (LICs), direct shares and using cash accounts and term deposits.
Of course, you can still be diversified and not invest in all those asset classes, and investors have complete choice over how they allocate funds to each sector and also the choice not to be diversified.
In part II here, I'll look at the different ASX securities you could invest in for most of the asset classes in the table above. Part III looks at options for the larger asset classes, and in Part IV we put it altogether.
