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How diversification fights investor biases

investing in familiar names may bring a sense of comfort but by focusing too heavily on the Australian market, investors may limit their opportunity set and forgo the benefits of greater diversification.

 

With the recent surge in global market volatility, many investors may be wondering whether investing internationally is still a good idea.

When it comes to confronting global challenges, no country is an island (not even Australia). Globalisation may be on the back foot, but for investors this only underscores the importance of international diversification and the need to overcome home bias.

Overcoming home country bias

Ease of access to the Australian market and the avoidance of currency risk make domestic shares an attractive option to Australian investors. And let's not forget the franking credits, which offer a nice tax advantage.

Investing in familiar names may bring a sense of comfort but by focusing too heavily on the Australian market, investors limit their opportunity set and forgo the benefits of greater diversification.

This isn't just an issue for Australian investors. Even in the United States, investors are well advised to diversify. Not all the opportunities are to be found in one country, and not every country is free of economic or market risk.

A high allocation to a single country creates concentration risk. It means investors are likely to do well when the domestic economy is strong but are more vulnerable to domestic events—whether bushfires and floods, or inflation and interest rate rises.

As the 2022 Vanguard Economic and Market Outlook points out, the recent divergence in global economic momentum reinforces the benefit of diversification. While some events like a global pandemic or supply chain shocks affect the whole globe, there will always be variability across countries and regions.

Differences in sector composition, the state of economic recovery, monetary and fiscal policy, and currency effects all contribute towards variety in the drivers of investment returns.

How ETFs can help you diversify

While diversification doesn't protect your portfolio against the possibility of negative returns, it can reduce your potential losses if the market does head south.

Diversification starts by investing across different asset classes, but it also includes diversifying broadly within each asset class by investing in a range of different companies and industries.

Both developed and emerging markets are potential sources of diversification for Australian investors. While the COVID pandemic hit emerging markets especially hard, lower relative valuations and the anticipation of increased global demand have made them attractive to many investors.

And it's not just international share markets that can help investors diversify. Exposure to hedged international bonds can also help offset some risk specific to the Australian fixed income market.

This need to gain broad exposure across asset classes is also driving demand for diversified funds, which are becoming a popular way to gain instant, broad market exposure within portfolios.

Since their debut in November 2017, Vanguard has seen significant growth in our diversified ETFs, which now have a combined $3 billion in funds. Our diversified range include four funds covering conservative, balanced, growth and high growth risk profiles. They offer a sophisticated all-in one investment with a simple structure and low cost.

Diversified asset allocation

A single trade gives investors exposure to local and international securities, including thousands of individual bonds and equities.

Gaining access to world markets expands your opportunity set by investing in companies large and small across developed and emerging markets.

We can't control how markets behave. But by setting a clear plan, diversifying across multiple asset classes, and minimising costs, we can stay in control of what matters: our long-term investment strategy.

 

 

 

Vanguard
vanguard.com.au

Louise Laing

Louise founded Salus Private Wealth to offer high quality personal advice to clients who want to work closely with an adviser for the long term. Her philosophy that understanding each individual and their motivations and needs is key to an enduring and successful financial planning relationship is at the heart of the business.

She first engaged the services of a financial adviser herself when she was in her early 20s (long before becoming one) and believes the non-judgemental support and education about her position and options provided at this early stage has allowed her to make confident decisions in different aspects of life since then.

This confidence and positivity in making choices, financial or not, is what she wants to give to her clients.

Superannuation & Retirement

Superannuation is one of the largest and longest duration investments most people in Australia have, making it a critical part of long-term planning even if retirement feels like a distant objective. For those in the lead into retirement, we design strategies so you have peace of mind that when you start to draw on your retirement savings, you have liquidity and stability to support that.

Legislation and rules are changed regularly, so advice can help you take advantage of opportunities to build for the future. We are authorised to provide advice on and to SMSFs.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

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While talking about death doesn’t seem like a particularly appealing prospect, it’s a topic we see as a vital part of financial planning. Importantly, it’s a topic for every adult, regardless of their stage in life. Without a proper estate plan assets may not be passed where you’d like them to go, family conflict can ensue, and in the event you lose capacity there may not be an authority in place for the person you would choose to make those decisions for you to do so. While it can be an uncomfortable subject, we are experienced in facilitating these conversations as part of our advice process.

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Managing debt efficiently can have a material impact on your financial wellbeing and lifestyle. Having a solid plan to understand where your money goes and manage cashflow and debt can eliminate stress and set you on a positive path toward achieving your goals.

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Once we have a clear understanding of what we are aiming for and how you feel about taking on investment risk, we can help direct your funds into appropriate investments to meet your goals. This includes recommending the investment structure, consideration of tax implications, asset types, and putting together a suitable blend for you. You will have transparency of and access to view your investments, providing security.

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Aged care needs can arise suddenly. The complexity of managing this can be a significant challenge at a time when your focus should be on the person requiring care. We can assess the alternative funding options to ensure you make an informed choice in the best interests of the person requiring care.

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The Trustee for Laing Weaver Family Trust T/A Salus Private Wealth (Corporate Authorised Representative No. 1305571) and all our advisers are Authorised Representatives of Sambe Investments Pty Ltd T/A Finchley & Kent, Australian Financial Services Licence No. 478766, ABN 67 078 995 856, and has its registered office at Three International Towers, Level 24, Tower 3, 300 Barangaroo Avenue.

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