A diversified portfolio invests in each of the major asset classes, in proportions that suit the risk & return profile of the investor. The major asset classes are shares, property, fixed interest and cash. A well diversified portfolio usually invests in a number of securities in each asset class, directly and/or via managed funds, and may invest in Australia and overseas.

What is the benefit of investing in a diversified portfolio?

A diversified portfolio reduces investment risk in two main ways:
1. Investment in a broad range of securities lessens the impact on a portfolio of one security failing.
2. Investment across the major asset classes tends to smooth the overall portfolio returns, because while one asset class is in a downturn other asset classes should be performing well.

The best of both worlds

A diversified portfolio gives you access to the potentially higher returns from quality shares and property, combined with the security of fixed interest and cash.

Case study

Let’s say you had $100,000 to invest on 1 January 1982. Chart 2 shows how much wealth you may have created by investing in certain assets by January 2017, assuming income was re-invested. As you can see, if you had invested your money into term deposits, it would have grown to $984,987. But if you had invested in a diversified portfolio, you would have $3,911,807. It’s a $2,926,820 improvement.

Now let’s assume you retired at the start of 2017. What would be your investment income position? Your diversified portfolio would be generating an income of something like $167,860 this year (based on last year’s income). On this, you and your spouse could expect to pay tax of $9,230 (as shown in Table 1). Compare that to the $24,132 net income you would receive from term deposits this year (based on last year’s income).

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Disclaimer: This information has been produced by Australian Unity Personal Financial Services Ltd (‘AUPFS’) ABN 26 098 725 145, of 114 Albert Road, South Melbourne, VIC 3205, AFSL & Australian Credit Licence 234459. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making investment decisions. AUPFS is a registered tax (financial) adviser and any reference to tax advice contained in this document is incidental to the general financial advice it may contain. You should seek specialist advice from a tax professional to confirm the impact of this advice on your overall tax position. Nothing in this document represents an offer or solicitation in relation to securities or investments in any jurisdiction. Where a particular financial product is mentioned, you should consider the Product Disclosure Statement before making any decisions in relation to the product and we make no guarantees regarding future performance or in relation to any particular outcome. Whilst every care has been taken in the preparation of this information, it may not remain current after the date of publication and AUPFS and its related bodies corporate make no representation as to its accuracy or completeness. Published: February 2017 © Copyright 2017