The Power of Diversification

Nobel Prize-winning economist Harry Markowitz once said that diversification is “the only free lunch in finance.”

A well-diversified mix of investments—aligned with your goals and risk appetite—can help you weather market ups and downs.

Why does this matter? Because consistently picking the top-performing asset class each year is incredibly difficult.

Consider this: according to Vanguard’s Investment Strategy Group, the best-performing asset class in 2024 was international shares (hedged), delivering a 20.7% return. That followed a 21.7% return in 2023—making it the top performer two years running.

On the flip side, the worst-performing asset class in 2024 was international fixed interest (hedged), which returned just 2.2%.

(Hedging refers to strategies that reduce the impact of currency fluctuations on international investment returns.)

But what about previous years?

In 2022, a far more challenging year for markets, international shares (hedged) saw a steep decline of 18.1%. That year’s top performer was cash, returning 1.3%, followed by Australian shares (-1.8%) and Australian fixed interest (-9.7%). The worst-performing asset class was hedged international property, which fell by 23.9%.

These swings highlight why diversification matters: spreading your investments across asset classes and regions can reduce overall volatility and help protect against outsized losses.

Making diversification simple

If you already hold a significant share or property portfolio, it's wise to consider the potential tax implications before making changes. Professional advice is key.

Still, there are many strategies and cost-effective financial products that can help you achieve a suitable level of diversification. Do your own research—or speak with a qualified advisor—to explore the best approach for your circumstances.

Rick Maggi CFP, Financial Advisor Perth, Westmount Financial