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Asset diversification: why you need to look beyond Australian shares

What you need to know

  • Diversifying your investments beyond Australia can help you harness greater potential for returns, by ensuring a single underperforming asset class doesn’t weigh you down;
  • Many Australians’ investment portfolios are heavily concentrated on local shares, cash and/or direct property;
  • The ASX recently experienced its worst quarter since the GFC;
  • All Six Park portfolios (from conservative to aggressive growth) outperformed the ASX over the past year.

Tough quarter for the ASX 200 

March was not a kind month for Australians who are heavily invested in local shares.  The ASX 200 was down almost 4% and experienced its worst March quarter (down more than 5%) since the Global Financial Crisis.  Possible trade tensions with China that could blunt local economic growth and the uncertain impact of the ongoing Banking Royal Commission (financial services comprise more than 25% of the ASX 200) are ongoing headwinds for the local markets. 

Current market conditions show why prudent investment diversification is critical to managing risk in your investment portfolio.  Managing risk does not necessarily mean lowering risk; it just means having the right mix of higher and lower risk/reward assets to achieve optimal long-term returns that align with your risk profile.

How does this play out in the real world?  Three months, and even one year, are short time periods from an investing perspective, but let’s have a look at Six Park’s portfolios to illustrate this point.

 Six Park portfolios against the ASX 200

Below are the asset classes that our customers are invested in, with allocations determined by their risk profiles.  March wasn’t much better (versus the ASX 200) for international and emerging markets shares, but having portfolio exposure to bonds, cash yield, and global property, in particular, helped offset poor ASX results.

Six Park Portfolios March 2018 Compared With Asx 200

Let’s also look at the 12 months to the end of March 2018. 

Six Park has five investment profiles, ranging from conservative to aggressive growth. 

The 12-month period ending 31 March 2018 has seen the impact of the February correction as well as increased volatility across global markets, with the ASX up 2.3% for the year (price performance, not accumulation returns).  Australia has been particularly affected by concern about the impact of a prospective trade war with China.

The graph below shows Six Park’s portfolio returns (after fees) compared with the ASX 200. This is a result of having allocations across a variety of asset classes. 

Six Park Portfolios 12 Months To March 2018 Compared With Asx 200

For the year, our most conservative portfolio has produced similar returns to the ASX 200 and our growth portfolios have outperformed the ASX 200 by ~2.5% to 4%, respectively. For a $100k account in our balanced portfolio, this represents approximately $2,400 of incremental investment returns that can be reinvested in the market and benefit from the power of compounding interest over time.

What has driven this dynamic?  Over this period, returns for our international share and emerging markets ETFs have been slightly more than 12% and 17% respectively.  Investors who do not have a measure of exposure to these asset classes over the past year have missed out on the growth prospects that they provide. 

We would never suggest that this level of performance should be expected every year, but if you are invested in just one or two domestic asset classes, you’re heavily exposed to its fluctuations. 

Six Park, actively guided by its world-class Investment Advisory Committee, believes prudent asset allocation and keeping investment costs low are critical to optimal investment results, especially when markets are volatile.

Markets go through cycles, so there will naturally be periods when the ASX 200 outperforms other asset classes.  It’s prudent to have a measure of exposure to the ASX 200 (Six Park provides this for customers via the State Street “STW” ETF (which tracks the ASX 200 index).

But with the rapid growth of ASX-listed exchange-traded funds (ETFs) and highly accessible online investment management services such as Six Park, there are new and better ways for Australians to invest internationally.

Click here to book your free, personal consultation to learn how Six Park can help you invest internationally.

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