Investing · Australia
Diversification: what it can and cannot do
Spreading investments can manage concentration risk, but it does not remove uncertainty.
Diversification is one of the most common ideas in investing. For Australian investors, as for anyone, it helps to be clear about what spreading money across investments can and cannot achieve.
What diversification can do
Holding a range of investments can reduce the impact of any single company, sector or asset performing poorly. It can make outcomes less dependent on one decision.
What it cannot do
Diversification does not guarantee a profit or protect against broad market falls. When many assets decline together, a diversified portfolio can still lose value.
Questions to ask
- How concentrated are my holdings in one company, sector or country?
- Do the investments I hold tend to move in the same direction?
- Do fees and complexity outweigh the benefit of adding more holdings?
Country context
This article refers to Australia. Investment products, tax treatment and protections differ elsewhere.
Editorial note
This article provides general information and is not personalized financial, investment, legal or tax advice.
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