She's On The Money - Diversification Explained

Episode Date: June 4, 2024

On your mark, get set, go! On today's show we explain investment portfolio diversification in 30 mins! We'll give you everything you need to know, plus share 4 tips on how to diversify your portfolio, and how to keep it that way! Acknowledgement of Country By Natarsha Bamblett aka Queen Acknowledgements. The advice shared on She's On The Money is general in nature and does not consider your individual circumstances. She's On The Money exists purely for educational purposes and should not be relied upon to make an investment or financial decision. If you do choose to buy a financial product, read the PDS, TMD and obtain appropriate financial advice tailored towards your needs.  Victoria Devine and She's On The Money are authorised representatives of Money Sherpa PTY LTD ABN - 321649 27708,  AFSL - 451289.See omnystudio.com/listener for privacy information.

Hello, my name is Natasha Nabanunga-Bamblett. I'm a proud Yorta Yorta, Kernai, Wolperi and Awadjeri woman. And before we get started on She's on the Money podcast, I would like to acknowledge the traditional custodians of the land of which this podcast is recorded on Awadjeri country, acknowledging the elders, the ancestors and the next generation coming through. As this podcast is about connecting, empowering, knowledge sharing and the storytelling of you to make a difference for today and lasting impact for tomorrow. Let's get into it. She's on the money.

She's on the money. Hello and welcome to She's on the Money, the podcast for millennials who want financial freedom. My name is Bec Syed and with me as always is Victoria Devine. Hello, Bec. Hello, VD. How are you? I'm excited for this one, but I feel like there's a little bit of pressure. There is. I'm going to say a little bit of a challenge. Yeah, all right.

And I don't know if you're up for it, but we're going to try, well, me being the listener and you being the actual person with knowledge, try and explain diversification in 30 minutes. Yeah, because that sounded like a good podcast title and we picked it before we actually recorded this episode. Yes. So now we have to kind of like adhere to that. We literally have to. What if we fail?

Do we just cut bits out? Well, if we fail. Yeah, it actually sucks to be the listener. Also, low key funny if you like clicked on the episode diversification in 30 minutes and then you see it's like a 42 minute episode. Exactly. It's going to be very hard to hide. Let's get into it then.

So let's try. Okay, the producers popped a stopwatch on. Fantastic. let's go no pressure all right so just really quickly after the break we will give you guys four tips on how to diversify your portfolio and how to keep it that way but first v what is diversification i love talking about diversification and you've heard me talk about it before and it's when i say you wouldn't want to put all your eggs in one basket right and you wouldn't want to do that why beck because if you put all your eggs in one basket and trip you're going to break all of

your eggs. Whereas if we put them in multiple baskets and you're just carrying one of your baskets because we have lots of little loads to do and you trip and one breaks, well, all of the other ones, they're okay for now, unless you're like real clumsy and you tripped every single time, which case I really can't help you. But diversification is an investment strategy that essentially lowers your portfolio's risk and then helps you gain more stable returns. Because Obviously, if you have your eggs in lots of different baskets, that's an analogy. We're not actually buying eggs, Bec. If we have lots of different investments, if one of them performs not so well, something

else is going to perform well. And then your average portfolio return becomes a bit more average instead of seeing the return of just one company. And you often see this with things like ETFs, right? So an ETF is an exchange traded fund. We have talked about these things before. I like them because they give you instant diversification because they're essentially a really big basket of lots of different types of shares. But if you deep dive into an ETF and

have a look at all their holdings, most ETFs hold 50 plus shares because they like to have a lot. I mean, a lot of ETFs might be the top 200 companies on the Australian share market, but you will look at it and some companies have, you know, returned a really good looking 42%. Some companies have been like negative 14% and it all comes out to be about an average of the market, which is what we're aiming for. Because to be honest, when we're investing, I just want you to have consistent, reliable returns over the long term to build wealth. Because unfortunately, get rich quick schemes don't work and they're kind of irresponsible.

Like when we're investing and we're investing properly, we're in it for the long haul and it ultimately should be a little bit boring. But when you dive in, diversification is a really important point because it kind of makes things more stable. Does that make sense? That does make sense. But can you kind of explain more to me like how that actually lowers risk? Yeah. So obviously, again, with the different baskets having different eggs in them, diversification is going to lower your risk because different asset classes perform differently at times. So you're not just looking at, oh, well, maybe if by chance this performs really well,

and if by chance something doesn't perform well, we'll be okay. It's actually more because we know that different asset classes perform differently during different periods of time. So the best example I can think of off the top of my head is during COVID, toilet paper sales did really well, right? So during times of economic turmoil, we will see staples do really well. So supermarkets, you know, thrive, all of those things that are essentially human essentials tend to do a little bit better than things that are more luxurious, right? So I think it's important to make sure that when you're picking your portfolio, you're not just picking it because you're like, oh, I need to diversify because if one doesn't do well, the other will, and that's just luck of

the draw. It's not necessarily luck of the draw. It's picking different asset classes. Look, if the market's not so good, Bec, we know there's a few tried and true assets in your portfolio that are going to stand the test of time and do well. But also during times of economic growth, you're going to see other asset classes do well, like infrastructure, or you might see more roads being built, or you might see more buildings being built, or even luxuries. So if you're going to invest in LVMH, which own a lot of the luxury brands around the world. Obviously, they're going to do really well during booming times because everyone's buying their wife a handbag, you know? So we want to make sure that we're not just diversified by having lots of

assets. We're diversified by having them across lots of different classes. Does that make sense? Yeah, I think it's starting to sink in for me and hopefully for listeners. But if you have to backtrack a few times, I don't blame you. So Veer, you mentioned asset classes before, and we have talked about them on the show, but can we get a quick little refresher? Yeah, so we have discussed it before, so definitely look for it in the podcast feed if you haven't heard this episode. But here in Australia, there are four main types of asset classes. You've got cash, you've got bonds, you've got property, and then you've got shares. Obviously, I love shares. And when we're talking about a diversified investment portfolio,

we're more talking about shares bonds and cash and the mix of those things so the best example is your superannuation right because most of us who have been employed are gonna have a superannuation account right and you would have your investment portfolio and your investment portfolio is not just made up of picking a diversified amount of shares it's also got some cash in it to bring some stability you'll have access to bonds so a bond is like a government IOU is my favourite way to explain it. You'll have one of those because during times when interest rates fall, bond prices actually rise because they're seen to be a little bit more of a stable investment. And when shares are doing poorly, bonds usually perform pretty well. So

again, it brings a bit more stability to your portfolio. It's kind of like having a seesaw and you're putting, you know, some shares on one end and you're like, oh, I need to put something else on the other end to make sure that this sits evenly, right? So this is what diversification is going to do. It's going to make the seesaw sit evenly, but you're doing this not just for your overall share portfolio, which could have cash, it could have fixed interest assets, it could have property, it could have shares. You're doing this inside your share portfolio as well, because essentially we just want to spread out our money in a way that means it's working as hard as we do for it but also it's at less risk and less risk means more assets. Okay that is a lot of information

to digest. Just a little bit. I mean there were only four asset classes we discussed. What were they Bec? Cash. Bonds. Oh yeah bonds. Bonds, cash. Yep. Genuinely I've forgotten. Property. Property and shares. Shares. Okay thank you so much. You've got it. I feel like I talk so quickly that sometimes I forget that other people don't keep up but also you've got to remember this is like a second language to me. Lots of people speak second languages and I do not, but finance is a language I speak. So it makes sense to me. And if it doesn't make sense to you, that kind of makes sense because you didn't go to school and study any of this, which is why I exist. Totally. And that's totally okay because here I am being on the show for like

more than a year now and still struggling. So if you are too, that's okay. Oh, thank you, Vida. That's so sweet. You're doing so well. No, I think it's good. Let's go to a really quick break. Yes. Let's take some time to digest it. and then have a coffee. And on the other side, we have another 15 minutes to talk more about diversification. Oh, okay. We're doing well. Welcome back, everyone. Since there is a time limit on this show, let's quickly dive back into it. Today, we are learning about diversification. V is diversification, just a matter of mixing up

the types of things I'm investing in, for example, like IT, blue chip, health, etc. How do you diversify is what I'm trying to say. You do. And I like to think of having a share portfolio like having a smoothie, right? Like it's maybe a little bit of a niche example, but like you don't just have a smoothie and you just have milk in it, right? Like you could have a banana smoothie or you could meet someone who hates bananas and doesn't want banana in their smoothie and wants a blueberry smoothie, right? Or they could be an absolute health freak and they've got like LCA and chia seeds and all the stuff that gets stuck in your teeth. It's not for everybody, right? So you're picking a smoothie with all the ingredients that you want, but you can't have a

smoothie with just one ingredient. Otherwise it's not a smoothie, right? And that's the way we should be seeing our investment portfolio. It is not an investment portfolio or a proper one if you only have one asset class in it, because it'd be pretty trash smoothie, right? Like no one's going to want to drink it, not really good. So essentially, Bec, to diversify well, you're going to need to invest across lots of different asset classes. We went through them before the break. We had cash, fixed interest, property and shares. And while those four asset classes are the four that are recognised here in Australia, we're just going to talk now about how to diversify inside your share portfolio, because most of us already have cash and understand that well. Bonds,

They're more of a fixed interest asset class. They're not too complicated, but they're also not as popular. Property, I think we all understand the great Australian dream. You know what that means. But did you know you can buy shares that are giving you exposure to the property market? Okay. So there are companies that you can invest in that they invest in purchasing like skyrise buildings and renting them out corporately to like office buildings, or they might have a whole building and lease out the properties to individuals. And then you can purchase shares in their company and get exposure to the property market by investing in them. Kind of cool if you're interested in property, but also don't want to own your own.

Yeah. Okay. So there's lots of different ways. So to make sure that you're properly diversifying, I've written down four things that you need to make sure your investments have so that you're well diversified. Are you ready? I'm so ready. Okay. So first things first, we want to review our investments. That feels really boring because it is. And sometimes the best parts of investing are really bland and they should be because if they're too aggressive, maybe we shouldn't be there because we don't want that aggression for the long term. So I want you to list down all your investments and what they're worth. So for example, do you have cash in a savings account? List that out. Do you have some shares? Do you have a managed

fund? Do you have, not in this economy, an investment property? Do you have your family home? Your superannuation is an investment. List that down. This is going to show you which asset classes you currently have exposure to, where you're investing and where you could spend a bit more time. So, for example, if I sat down with somebody and they said, oh, V, I'm really interested in diversifying my portfolio. I go, great. What have you got? And they say, well, I own my home. and I've just bought my first investment property. I go, that is fantastic. If we were doing a graph, we'd have a look and be like, how much cash do you have? And they go, look, not much because I've just bought my first investment property. All right. Do you have any bonds or fixed interest?

No, none. Never prioritized it. That's cool. Where's property? Property graph is up here because they have their home plus their investment property. Do you have shares? No, of course not. I've spent all my money on property and their shares are down there. So you kind of go, all right. Well, obviously, if you're super passionate about just property, you don't like shares, you don't like fixed interest. Who am I to judge? Like, who am I to tell you, you have to have an asset class? You don't have to. But what I would be looking at is going, okay, cool. So do we want to kind of increase that bar of cash or fixed interest or shares? Because you have a lot of exposure to property. So maybe they say, yeah, V, I'd really like to look at shares. At which

point you go, fantastic, that's another great way of diversifying your investment portfolio as a whole. And then we would pick up the conversation of, well, what shares? At that point, we're probably not looking at shares in those property companies we were talking about because they actually already have heaps of exposure to property directly. So I'm not going to then set up a share portfolio for somebody and then give them more exposure to property. that doesn't create good diversification. We would be looking at the examples you listed. Are we looking at healthcare, IT? Are we looking at some blue chip banks that are going to kind of balance out that property that they already have? Does that make sense?

Yeah, absolutely. So that leads into the second one, because we all know that when I make a list, I just go rogue anyway. We're going to identify gaps and research other asset classes. So that's where we're going to look at those bars that we've hypothetically made up and that's where we go yeah they don't have shares they don't have fixed interest they don't have much cash where could we increase this to kind of balance it out yeah and if most of your money is in two asset classes or one asset class like let's have a look at the other asset classes to make sure that you do have diversification because as I said before you might be absolutely fine right now like Bec let's pretend that the

economy isn't cooked and you have two investment properties. Interest rates are going really well and you look at me like I've got, you know, mud on my face because you're like, V, that makes no sense. Look at my investment properties. My tenants are paying rent. I'm fine. That was five years ago. Come into now economy, your interest rates have increased. Property isn't looking as good. That investment, even though your tenants are paying the same amount of rent, isn't returning as much because your interest rates are now costing you more. And actually owning those investment properties is costing you more money than it's making for you. So returns are going to ebb and flow over time. But if we had looked at your investment portfolio and gone, all right,

you've got property, we're going to look at some diversified options here. They could be boosting your overall portfolio up because even though the property is not making you heaps, it's being balanced out by your share portfolio. And in your share portfolio, perhaps you chose a whole heap of stable things, which in this economy, we all know cosmolies are doing really well. It's all over the news. So those might be the things that we've put into your portfolio to kind of balance everything out. So ideally, the point of balancing things out is when one's not doing well, something else is so that we get an average return of the market, not necessarily blowing it out of the water, but we're making sure that we are safe. Does that make sense? Yeah, absolutely. I feel

like I keep saying, does that make sense? And I hate when people do that. So I do apologize. No, don't apologize. I like that you're checking in with me. All right. Okay. What next? All right. So the third thing I've written down is invest overseas. So we love the Australian share market. She's real cute. She is very well diversified, but she's small. So like she's not very tall and we need to get a tall friend. And Australia essentially has a really small share market in comparison to the rest of the world's investment opportunities. So investing some of your money overseas is actually going to lower the risk of investing in a single market. So for

example, investments in Asian or European investments might perform well when the Australian market is falling. So this comes into currency as well. So we know right now, if you wanted to travel to America, not only is America really expensive, it's more expensive for you, Bec, because the exchange rate is going to screw you a little bit when you go over there, right? Like we went over last year for work and the exchange rate blew my mind. Like I was paying like $15 for a coffee Australian, even though American, that's clearly not what it costs, but my exchange rate just put me a little bit backwards. But if you're investing overseas, we're making sure that things are a bit more balanced. So for example, I have spoken about this on the podcast

before. I mainly invest in ETFs. And I think a lot of people are really shocked to hear that because they go, but Victoria, you were a financial advisor, like you know how to do big dog investing. And I do, but I'm also lazy. And why would I spend hours upon hours upon hours picking out what I deem to be a perfect investment portfolio, do you have to rebalance it after 12 months and redo that whole process? When, and this is just personal opinion, this is not advice, when I could go and buy an ETF or a managed fund that has a professional investment manager who manages those investments and the shares that are inside that bucket for me. And I'll just give you my money. You're way smarter at this than I am. Yes,

I'm really good at investing. And when I was a financial advisor, I had the absolute privilege of talking to investment managers basically on a daily basis. I would check in with them. I would make trades on behalf of my clients and do all of that for 40 plus hours a week. I don't do that anymore. So I focus more on content for She's On The Money. I focus more on other stuff. I have a baby. I'm focusing on him. So I think it's really important to make sure that we are working out, is that the best use of my time? Or am I going to invest in something where it's semi-managed for me? Like I know that if a share is performing not so well, that's okay. That's how the market does. But if it's performing not so well, and it was actually a bad investment, my investment

manager is going to kick it out of the portfolio. They can make that decision for me. But as you know, because I've spoken about it on the show before, I don't just have one ETF. I haven't just picked an Australian ETF and been like, wham, bam, thank you, ma'am. I have an Australian ETF and I have an international ETF to make sure, because obviously I've purchased an ETF, diversification immediately because I've got access to so many different assets inside that share portfolio, right? But then I have a second ETF, which is international. Not only is that well diversified because it's got lots of different shares in it and lots of different, I guess, industries, I have Australian versus international. So then I've kind of like double-stacked my diversification.

We love a double stack. Like, tell me that double-coated Tim Tams aren't the best type. I mean, they are arguably, objectively. Objectively speaking, double-coated Tim Tams are the best. Therefore, double-stacking our diversification obviously makes more sense. So not only have I diversified inside each ETF, I've also diversified so that if the Australian market's doing well, the international market might be a little bit more rocky. And if the international market's doing really well, maybe Australia isn't. So I've kind of balanced it out that if one ETF's performing well, maybe the other isn't and vice versa. Sure. Does that make sense? Totally. I

love the double stack because it makes me feel really confident. And that's why maybe you would too. It's a beautiful portfolio. Double stacked, double coated Timberlands. That sounds delicious. Okay. Is there anything else to keep in mind? One more, but I've actually jumped ahead and explained it to you already. And that is investing through managed funds, managed accounts or ETFs, right? So as we said before, a really simple way to diversify is to invest directly in something like an exchange traded fund, where not only is somebody else managing it, but they've created a basket of shares that gives you diversification immediately. Now, the thing you have to be careful of here is while an ETF gives you diversification, it might be an industry-specific ETF and that's

totally okay. Sure. But if you go back and go, all right, I really want to invest in an ETF and then you find a tech ETF that tickles your fancy and you go, I really want to purchase that, You need to remember that even though there are a number of companies inside that ETF, you know, there might be 30 of them, that ETF is only giving you exposure to one industry and that is tech. And you might go, okay, well, in that case, I might pick a couple of ETFs in different industries to make sure I've got diversification because if tech's not doing well, something else might be.

Does that make sense? Yeah, definitely. Whereas the ETFs I've picked are not industry specific. And the reason I've done that is because I wanted to keep it simple. And sometimes the simplest things work, right? Yeah, 100%. I mean, they're not double coated Tim Tams, but like when you're not well, what do you want?

Just buttered toast. Absolutely. Keep it simple. It's tried, it's true. I'm going to want that for the rest of my life. And that's how I kind of see my investment portfolio. That's a good way to look at it, actually. Yeah, I really like buttered toast.

Do you put like a little bit of salt on your buttered toast? I do. Or just some olive oil. Oh, yes. After talking about eggs and Tim Tams and butter toast, I'm starving. I'm ravenous. I actually could go a double coated Tim Tam.

Let's do it straight after this. All right, all right, all right. All right. Is there anything else? No. Yes. Maybe. How much time have we got left?

We've got a little bit of time left. I'm very proud of us, actually. All right, let's go. I'm always proud of us. Like, we don't even have to do anything and I'm proud of us. It's all good. Like, did you exist today? Wow.

Good for you. I'm wasting time. This is so bad. True. All right. So what I want you to do is keep an eye on your portfolio. So diversification, really important, but it's not set and forget. As much as we want it to be boring and not that exciting when we're picking our investments, we do still want to keep an eye on it because as your investments rise or fall, you could have more money in one asset class than when you started

investing. And this could become less diversified. So, an example of this is I have recently rebalanced my investment portfolio. What does that mean? Don't worry, I'll do a whole episode on rebalancing. We have spoken about it on the podcast before. But essentially, I sat down and I looked at my investment portfolio. I do have a lot of what we call satellite investments, which is investments sitting around these two main ETFs that I own. But what happened was one of my ETFs had performed significantly better than my other ETF. And it meant that instead of being 50-50 in ownership, which is what I started with, I was at like 30-70 because of how well one had performed. So what do you do in that circumstance? What I did was I sold down some

of the portfolio who had gotten up to that 70% because I was like, well, you're doing well. What I'm going to do is take some money off the table. We're not going to take it all off the table. I'm not taking it out and putting it in my bank account, but I sold down some of the shares and put that money into my other ETF. So it was back at 50-50. And the reason I did that is not because the other one wasn't performing, because you might go, V, well, if the other one wasn't performing, why on earth did you put more cash into it? It's because the market was off. And essentially that ETF was a little bit cheaper. So if something has done really well and it's performing really well, I'm going to take the profits and I'm going to tip them back into the

ETF that right now I saw as a really good price to pay per share. Does that make sense? So that then later I'm still at 50-50, hopefully one of them tops up again and I will rebalance and tip from one jug to the other so that we're always a bit even. But over time, yes, I'm tipping from one to the other, but they're still going up, aren't they? They're going up evenly though. oh my god that's really really smart actually so that's my last point because i think we're out of time okay oh my gosh i think we made it i think we made it but like yes we also aren't the editors so our podcast producer and our podcast editor you know what make it half an hour thanks guys thank you don't cut out any of the stuff about tim tams we love you do what you

gotta do all right i think it's exciting so obviously before we go just wanted to reiterate One, double-coded Tim Tams are the superior Tim Tam, but two, it can actually be quite hard to find the right investments. Obviously, it could be as simple as picking two ETFs that make sense for you and starting your journey there. But if you are really overwhelmed or you don't know what to do, definitely have a chat with a financial advisor or someone who can set you up. And you can be matched with a good financial advisor via my website because, look, I don't trust a lot of people but i do trust my own crew so if you would like to meet one of those delightful humans head to my website and i can tee you up it doesn't cost you anything you're so nice i mean the advice will

cost you something it's not just free but you know what i mean i'm not gonna charge you to get advice from me gotcha let's go have a double-coated tim tan oh my god let's go all right bye everyone bye the advice shared on she's on the money is general in nature and does not consider your individual circumstances she's on the money exists purely for educational purposes and should not be relied upon to make an investment or financial decision if you do choose to buy a financial product read the pds tmd and obtain appropriate financial advice tailored towards your needs. Victoria Devine and She's On The Money are authorised representatives of Money Sherpa PTY LTD ABN 321 649 27708 AFSL 451 289.