WEEKLY E-MAIL

20 May 2022

DIVERSIFICATION IS KEY TO INVESTING IN ALL MARKET CONDITIONS

By Ngoc Christodoulou

There is always a level of risk and uncertainty when investing. This seems particularly true in the current climate of growing inflation in Australia and overseas, rising interest rates, the COVID-19 pandemic, the Russia/Ukraine conflict and China’s pursuit of a zero COVID strategy, which have roiled financial markets calendar year to date. Understandably, these unforeseen factors can make investors nervous; however, remaining invested is important in depreciating markets which are often short term, and being invested will see you participate in the market recovery.

When investing for the long term, short term volatility should not affect your portfolio’s overall long term performance. Diversification is key to portfolio construction, where the goal should be to reduce risk and protect capital while achieving long term returns. A well-diversified portfolio ensures you are not exposed to any particular investment risk. The performance of individual investments have different drivers.

Diversification is not putting all your eggs in one basket. However, when it comes to investing, you also need to understand the correlation of how different investments respond to different circumstances.

It is essential to have your investments spread across various asset classes. As a basic rule, the investments expected to produce the highest long term returns can also be the most volatile in the short term. A good mix of investments can help produce the desired return and also not expose you to more considerable losses. The best and worst-performing asset classes generally vary over time, so it makes sense to have a combination of assets in your portfolio.

In the past couple of years, there has been an outperformance from International equities compared to Australian equities. Investments in the US tech stocks such as Meta, Amazon, Apple, Netflix and Alphabet have provided excellent capital growth for portfolios up until November 2021. Recent increases to the US 10 year Treasury Note (Government Bond) to 3.2% has shown that growth stocks are vulnerable to rising interest rates, evidenced by the recent sell-off of tech stocks in the US. The Nasdaq 100 has fallen 23% from its peak in November. Overall the MSCI World index is down 1% for the Financial Year.

Australian equities are currently performing better than overseas markets, with demand for Australian resources and commodities increasing mainly due to the ongoing conflict in Ukraine. Australian bank shares are performing better, following the upward shift in interest rates. Overall Australian shares have provided a positive return of 5% for the Financial Year.

Other asset classes, such as infrastructure and real estate, have performed reasonably well this Financial Year. Their performance is often less correlated with share market movements.

The key factors to a well-constructed portfolio are:

• Diversify by asset classes such as shares, property, fixed interest, as well as unlisted investments and alternative assets to generate returns that are uncorrelated with stock markets
• Diversify within an asset class. For example, you can invest in shares in different companies, industries and countries
• Diversify across regions, such as Australia, Asia, the US and Europe
• Diversify over sectors and industries sectors, such as technology, banking and finance, healthcare, renewable and alternative energy and industrial investments.
• Invest in quality companies with solid balance sheets, strong cash flow, a strong position in the industry they operate, and good governance.

A carefully constructed portfolio should be able to withstand short term volatility better. It is not about timing the market or predicting the future. Making slight adjustments to your overall investment allocations over time can assist with capital preservation and achieve strong returns.

Ngoc Christodoulou
Associate Financial Planner
Authorised Representative No. 1271825

If you have any questions or comments, please email me at ngoc@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution.  The information here is of a generic nature, and does not take into account your investment objectives or financial needs.  No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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