Diversification: why is it important for your super?

What is diversification?

We all know the potential advantages of not putting all your eggs in one basket. There’s a word for that in finance: diversification. It’s a risk management strategy which, simply put, involves dividing your investments across multiple types of assets to help reduce total risk.

Here are the key points we cover in this article:

• Risk versus reward
• Why diversification can work
• Dimensions of diversification
• How Rest diversifies super across investment options

Why diversification can work

Investing is a lot more fun and rewarding if you can avoid losing money too often. But we know assets decline in value sometimes.

By combining different assets, we can build a portfolio of investments where the negative performance of some assets might be offset by the positive performance of other assets. Put simply, diversification aims to soften the blows and smooth out the kinks.

For example, if you invest in company X and that company goes through some challenging times, the impact on your overall investment portfolio will be less where you have invested in several different assets compared to if you had invested all of your portfolio in just company X.

If we’re looking to reduce risk as much as possible, spreading your portfolio across a range of assets that behave differently should help you capture the greatest diversification benefit, by aiming to:

• reduce risk;
• decrease volatility; and
• smooth returns.

Conversely, investing in assets that behave very similarly will provide limited diversification benefit.

Dimensions of diversification

Investors can seek to manage the risk level by diversifying their portfolio in many ways:

• Number of assets — you might own one, several or many assets.

• Asset class — you might invest in shares, bonds, property, cash, or alternatives.

• Geography — you might hold investments in Australia, or across multiple different continents like Asia and Europe.

• Industry — you might invest across multiple different sectors like finance, agriculture and technology.

• Time — you might invest your funds over time instead of all at once. e.g., if you invest $1,000 a month for 12 months, rather than $12,000 all at once.

• Strategy — you might choose different investment styles, as different styles may perform better under certain conditions.

How you choose to diversify depends on the level of risk you’re comfortable with taking. For example, if you have a very high tolerance for risk, you might put all your money into the shares of one company. If that company does well, you’ll be handsomely rewarded. But if the company goes bankrupt, you may well lose your entire investment.

For super, it’s generally uncommon for someone to take this level of risk with their retirement savings. For a Rest member, taking such a risk isn’t possible as we don’t offer the ability to put all your super into one company’s shares. 

How Rest diversifies super across investment options

The good news is that every Rest investment option includes some level of diversification. For example:

Member-tailored options

• ‘Australian Shares’ is one of our highest risk options (risk band 7/7). It diversifies across different Australian shares and across different Australian industries.

• Australia may be known as the ‘lucky country’, but Australian companies come with their own unique set of risks. 'Overseas Shares', for example, are typically less risky due to an extra layer of geographic diversification, i.e., overseas shares includes many different countries so if one country does poorly the others can still perform well. Therefore the ‘Overseas Shares’ option is classed as comparatively less risky (risk band 6/7).

Structured options

• All of Rest’s structured investment options, ‘Core Strategy’, ‘Capital Stable’ etc, diversify across asset classes, industries, and geographies.

When picking investment options, you should decide what risk is appropriate to take, based on your circumstances and tolerance for risk.

To help our members achieve their best personal retirement income, Rest uses a range of risk management strategies – and diversification is one of the most important of these.