Diversification in shares + why it’s so important

Imagine if our desks were actually this aesthetically pleasing… alas it’s not to be…

Victoria was having a chat with Brooke from Sharesies (a stellar investment platform that’s recently  become available in Australia) last week about education in investing, and one of the key things that came out of that chat was that people don’t often understand the importance of diversifying their portfolios. 

It sounds kind of complicated (especially if you’re new to the investing space), so we decided a blog post  was in order to help clarify its importance, which is exactly what this is. Welcome.

To understand how and why we need to diversify our shares, it’s important to understand how the  share market actually works.

Put verrrrry basically, when you invest in shares, you’re investing your money into a company, making  you a little baby stakeholder. As is the way of the world, sometimes certain industries and companies  thrive (like Zoom in 2020) and others struggle (tourism in 2020), which respectively, can be a good thing  or a bad thing for you as a baby stakeholder.

If you had ALL of your shares wrapped up in tourism companies last year, then the value of your share  portfolio would have plummeted, because that industry really took a hit as travel halted across the globe. 

But if you had a few shares in tourism, a few in IT, some in a car manufacturer and some others in a  pharmaceutical company, then the shares that remained of value likely would have balanced out any  losses felt.

This is called diversifying our investment folio and it is the key to risk minimisation when it comes to  investing in shares.

As well as strategically choosing to invest in stocks from different industries and companies, another way  of mitigating risk and maximising return when investing is by investing internationally, which very  conveniently (especially for new investors), is something investing platform Sharesies allows you to do (they offer access to share markets in the US, NZ and Australia).

Most of She’s on the Money readers would be aware of the ASX - the Australian Securities Exchange - where Aussies buy and sell shares every day. While we can certainly diversify our portfolio within the  ASX, buying international shares allows us to diversify our investments even further. How? Well,  international investing affords you opportunities you may not be able to access in Australia, plus the scale  of the global market is obviously far larger than the Aussie market alone.

Because we’re exposing ourselves to the global economy rather than just the Aussie economy, it  means that if the Australian economy has a downturn, our portfolio will hopefully be balanced by the strength of other global markets we invested in. Essentially, that we don’t have all our eggs  in just one market basket.

Lots of investors choose international shares like those available in the US because they do have more  options in the AI, IT, aerospace and pharmaceutical sectors, which aren’t as common in Australia where  our share market has a stronger presence of mining and finance companies. The long story short?  Diversifying your portfolio by incorporating some international shares could be a very smart idea indeed.  

If you’re keen to learn more about investing and why diversification is so very important, we’d highlyrecommend a read through the blogs written by our pals over at Sharesies (like their blog on diversification) – their content is brilliant (and very easy to understand) and we have a feeling you’re going to be a big fan.

***Please remember our blogs aren’t intended as financial advice - they’re intended only as a starting point to give you a little extra info! For more in-depth advice catered to your personal financial position, please see a certified financial advisor.