The research also revealed that Australian investors tended to react to uncertainty overseas by reducing their exposure to international shares. While this may seem like a sensible move in theory, it also means your overall portfolio could become dependent on a smaller pool of asset classes.
Diversification should be considered a key part of any long-term investment strategy, as a diverse portfolio of investments could allow you to spread your risk exposure across different asset classes and markets, rather than putting all your eggs in one basket. This offers a financial buffer whenever an individual asset class declines in value.
For example, a well-diversified Australian shares portfolio is better placed to withstand a market correction than a single Australian shareholding. A global shares portfolio is likely to weather the storm better than a single-country share portfolio. And a multi-asset portfolio, combining both bonds and shares, should outperform a share portfolio in a downturn. Therefore, portfolio diversification can be helpful to investors in balancing market losses during periods of volatility.
However, when tailoring your investment mix, it’s also important to consider how much risk you are willing – or able – to take when investing. For example, growth assets such as shares generally carry more risk than more conservative assets such as fixed interest or cash. If you’re a younger member with a longer investment horizon to retirement, you will likely have more time to ride out market fluctuations and can take advantage of growth opportunities than older members who are in or approaching retirement.
Thinking about changing your investment strategy? A financial adviser should be your first port of call. They can help by reviewing your portfolio to make sure you have the right investment mix based on your financial goals, investment timeframe and unique risk appetite.
You can learn more here about how you could reduce the impact of market movements.