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Diversification weapons
Diversification weapons - ASX - Australian Securities Exchange
Quote:
By Robin Bowerman, Vanguard
Diversification means not putting all of your investment eggs into a single basket. It sounds easy in theory, but in practice it has been a difficult and expensive thing for most sharemarket investors to achieve. Exchange Traded Funds (ETFs) solve this problem.
The bear market has delivered a savage lesson – not being diversified carries enormous risk. Companies worth billions have been eradicated or reduced in value by 80 per cent or more. Investors who were concentrated in those toxic companies have suffered losses far in excess of the market averages.
Unfortunately, many sharemarket investors are still facing a concentration risk. They might only own shares in a tiny proportion of the top 300 ASX companies because the costs of diversifying have, until now, been prohibitive.
Assuming a minimum brokerage cost of $20 it would cost $6000 to buy shares in each of the top companies in the ASX300. Normally, only investments of $2 million or more would justify brokerage fees that high – meaning ‘market wide’ diversification is frequently out of reach of most investors. Most settle for an unhappy compromise where they are only ‘somewhat’ diversified, instead of being broadly diversified.
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This is a general comment only and does not constitute advice. Before making financial decisions you should seek advice from a professional adviser, who can take into account your specific circumstances and investment goals.
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