Risk and diversification
Risk is more than a scary red number.
Seeing your investment drop is unpleasant. But the real question is whether you’d need to sell it while it’s down.
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Risk is more than a scary red number.
Seeing your investment drop is unpleasant. But the real question is whether you’d need to sell it while it’s down.
A price wobble: “Volatility” is just the term for prices moving up and down. Even a sensible long-term investment can have rough patches.
Needing cash at a bad time: If your car breaks down and you need the cash tomorrow, selling after a market drop could lock in a loss.
Main point: A falling price matters even more if you’ll need to sell to cover a bill. Think about when you might need your money.
You wouldn’t want your footy team to rely on one player.
If your team needs one star to win every match, one bad game can hurt. Holding shares in only one company is a bit like that.
Diversification spreads some risks.: Diversification means spreading investments across different businesses, industries or places. It can soften the blow if one holding runs into trouble, but it won’t prevent a general market fall.
What if one company has a bad year?
Imagine one company drops 30% and every other holding stays the same. Move the slider to see what happens when more of your money is in that one company.
It’s a deliberately simple example. In a real downturn, other holdings might fall too, even if you’ve diversified.
Can you diversify away every risk?
No. If markets around the world have a bad year, owning lots of different investments won’t magically stop losses.
Different countries: Investing overseas can spread country risk, but overseas markets can fall at the same time as Australia’s.
Different industries: Different sectors help avoid relying on one industry, but the wider economy can affect them all.
Different asset types: Shares, bonds and cash can behave differently. Each comes with its own trade-offs.
Main point: Owning a mix can reduce reliance on one company or industry. It won’t stop every loss.
Don’t put everything on one outcome.
A mix of investments can stop one company from making or breaking your whole plan. It can’t guarantee you won’t lose money.
Don’t rely on one thing: One company going badly hurts more when it makes up most of your investments.
A basket can still fall: A broad mix can still lose value when markets fall together.
Main point: Spreading your money around helps with some risks. A whole market can still fall.
What to remember
Putting everything into one investment leaves you exposed if it goes badly. Spreading things out helps with some risks, but markets can still fall together.
When you look at a fund, check whether it holds different companies, industries and countries or mostly relies on one area.
General education only. Examples are simplified. Investments can lose value.