Diversification, spreading out your investments over a variety of industries and geographies to reduce risk, is one of the most important precepts of investing.
It's often described as a 'free lunch' because diversifying your investments reduces the personal risk to you if 1 of your investments go bad. Some studies suggest the best diversification can be achieved with as little as 12 diversified investments.
Here are 3 powerful ways you could diversify your portfolio today:
Own an LIC
Many Australian investors are concentrated in big shares like Commonwealth Bank of Australia (ASX: CBA) and Wesfarmers Ltd (ASX: WES). They typically get this concentration doubled again when you consider the typical asset allocation in their superannuation funds.
Instead, consider owning something like the WAM MICRO FPO (ASX: WMI), the latest microcap fund from Wilson Asset Management. Wilson has a great track record, and the microcap space is one that few investors have any exposure to.
Diversify over time
It's impossible to pick the market's ups and downs, but by committing to invest more money in the market over time, you can meaningfully improve your returns, especially if you're buying when the market is down. For that reason, you could also consider breaking your intended purchase up into halves or thirds, and investing it in a company over time. This lets you benefit especially if you think you could be wrong about a company's fair price.
Go global
Consider owning a company like Cochlear Limited (ASX: COH) or CSL Limited (ASX: CSL) that draws most of its earnings from overseas, reducing exposure to the Australian economy. These companies also report in US Dollars, which can be favourable in times when the Australian economy and currency weaken.
