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The Importance of Diversification

It may seem like an oft-quoted investment cliché, but portfolio diversification - that is, avoiding putting all your investment "eggs in one basket" - is one of the most effective ways to reduce risk, preserve wealth and improve returns.

Every investment carries risks and is subject to potential unforeseen changes. No investment, not even government bonds or bank deposits, is ever completely safe and guaranteed. If your portfolio is narrowly invested in a limited number of assets or sectors, then an unexpected change in conditions affecting those assets or sectors could have a drastic impact on your returns. However, if your investment "eggs" are spread across a wide variety of sector and asset "baskets", each with different characteristics and profiles (i.e. what experts coin "uncorrelated" assets), then the risk of your portfolio being impacted by change will be reduced. This is because the negative performance of some investments will tend to be neutralised by the positive performance of others. Over the longer term, the entire portfolio will be expected to yield higher and less volatile average returns. Put another way, diversification is a way of "taking a bet each way" with your investments. Since no one really knows what the future will hold, spreading your "bets" across different options (or in this case, investments) enables you to reduce the risk of making the "wrong" decision.

At Six Park, we utilise a range of carefully selected exchange traded funds (ETFs) to deliver investors highly diversified portfolio holdings. Using this approach, your money is invested across literally thousands of companies, sectors, asset classes and positions - instantly and inexpensively delivering you a truly diversified portfolio.

Although we are a proud Australian owned and operated business, we recognise that the Australian share market makes up less than 2% of the world’s total by market capitalisation - and that as such, limiting one’s investment pool to the local market will inevitably limit the investment potential and risk mitigation benefits afforded by the global market. As part of our focus on asset diversification, we ensure our client’s portfolios include appropriate allocations to (Australian-listed) ETFs which invest in international markets and opportunities.

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