Diversification.
You've probably heard that word tossed around financial circles at least once or twice.
But what is it? And – perhaps more importantly – how can you implement it?
Basically, diversification is the process of minimising risk by spreading your investments within or across asset classes.
For example, if you had $1 million to invest, you might split it up across shares, property and cash. That way, if the property market collapsed, you'd still – in theory – have your shares. Vice-versa for the sharemarket.
But you can also diversify within asset classes. For example, if you had $400,000 to invest in shares. You might invest $10,000 in 10 local shares, and a further $10,000 in 30 international shares.
That way, if the local sharemarket plunged you'd still have your international shares.
Diversification isn't perfect, but its purpose is to minimise risk – not eliminate it.
Your instant 5-share diversified portfolio
Despite the obvious benefits, however, many Australian investors prefer to invest in the local market only. While there are a number of drawbacks to this strategy, it's not the end of the world.
Indeed, investors can quite easily diversify their shareholdings from what's available on the ASX alone.
Here're five ASX-listed investments you could consider owning:
- SEEK Limited (ASX: SEK). SEEK is already the leading job ads website in Australia but it is also growing strongly in foreign markets. Thanks to a recent fall in share price, it's expected to pay a dividend equivalent to 3% fully franked in the year ahead.
- ResMed Inc. (CHESS) (ASX: RMD) is the leading device manufacturer for the treatment of sleep apnoea and related respiratory disorders. It generates 43% of its revenues from the America's market alone.
- iShares Europe ETF (ISHEUROPE CDI 1:1) (ASX: IEU). Don't let the name fool you, this Exchange Traded Fund (ETF) simply tracks the share prices of all European companies included in the S&P Europe 350 index.
- Westfield Corp Ltd (ASX: WFD) is the global owner of Westfield shopping centres. Not only can investors get exposure to foreign markets with Westfield Corp they also get exposure to one of the world's best property companies.
- Macquarie Group Ltd (ASX: MQG) is Australia's leading investment bank. In addition to its push into 'annuity-style' businesses locally, Macquarie is aggressively expanding overseas – with great success.
