Since the 1960s, businesses have been moving towards a more diverse workplace, where staff are a mix of gender, religion, race, age, ethnicity, sexual orientation and so on. This practice makes a workplace strong and representative of the society we live in.
While acknowledging how far we’ve come with diversity on this front, I want to talk to you now about diversity of a different kind that’s so important if you want to build your wealth. It’s called diversification of your portfolio. When it comes to wealth, multiplication is the name of the game and the main way you’ll multiply your wealth and do it safely is through diversification.
Let me explain.
A few weeks back. I wrote an article about asset classes. There are four main classes:
- Fixed interest securities
There are others but let’s concentrate on these four for now.
I was both consciously and unconsciously biased towards property and collectibles. Like a lot of Aussies, I love property. I have the Tina Turner addiction – it’s simply the best. And the creative in me also leans me towards the arts. On that front the Robert Palmer factor comes into play – I find it simply irresistible!
So while I’ll always have this unconscious leaning towards those two classes, I needed to consciously look at my portfolio of precious assets over the years and include others, such as shares, which is my current compulsive obsession.
So if I love property and art (collectibles) so much, why did I move into shares?
Again, let me explain.
While houses (bricks and mortar) are pretty safe investments, I’ve learned along the way that property markets can get trashed. In the GFC, Gold Coast and even Palm Beach properties in Sydney saw huge price crashes.
If I kept all my investment money in property, my portfolio could be badly affected and I’d have to wait years for it to recover. Also if I have a place worth $1 million and I need $100,000 for an emergency, I can’t sell off a room in a property I own. On the other hand, shares are more easily turned into cash. The experts refer to them as assets that are more liquid.
Property in New South Wales went through a bad patch for years earlier this century, while share markets rocketed, with the exception of the crash around the Global Financial Crisis.
This means while my property portfolio was losing value, I was picking up good income (dividends) and capital growth (shares go up in value) from rises in the stock market.
The same could happen with shares. This pandemic-induced recession we’re currently in saw the share market collapse between late February and March 23. Although recovering from those horrendous lows, it has been volatile ever since. Imagine if you had all your money in shares when we saw the market tank back in March. If you had a $100,000 in shares you could have lost $35,000 in a month — that’s a 35% smashing! Seriously depressing stuff.
If you’re diversified, you can be comforted by knowing that there’s upside on the property front, which is still up for the current year.
You’re spreading your risk and it’s important to consciously do this.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.