Diversification is the closest thing to a free lunch in investing. It's a simple idea. Invest in a variety of shares such that the investments have little correlation to each other. Doing so should help smooth out some volatility.
Although diversification is a simple concept, its implementation requires some thought, and it's easy to fall into the trap of holding a larger number of holdings without getting much material diversification. For instance, if you own shares in Telstra Corporation Ltd (ASX:TLS), TPG Telecom (ASX:TPM), and Vocus Group Ltd (ASX:VOC), you don't get significant diversification. Yes, you do get diversification from company-specific risks, but there's no hiding from industry-wide challenges.
Broadly speaking, you want to consider both systemic and non-systemic risks.
Systemic risks are non-company-specific hazards. These affect many companies in an economy. Recession, inflation, deflation, war, and natural calamity are examples.
Company or industry specific uncertainty is called non-systemic. A fire at a company's factory, regulatory risks, and breaking debt covenants, to name some, belong to this category.
One approach to building a diversified portfolio to consider is to find your favourite ASX listed companies across many different industries. Including businesses from a variety of industries should help minimise your non-systemic risk.
But how do you shield yourself from a systemic risk such as a recession? Just because we haven't had one in Australia for a long time doesn't mean we will never see one! I 'm not saying there's a recession around the corner, but just talking about strategies to deal with one if and when it arrives.
One way to balance a national recession would be to have exposure to international shares. Holding global behemoths like Alphabet Inc (NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN), or Apple Inc. (NASDAQ:AAPL), provides exposure to some of the biggest and best-run enterprises in the world. And as a bonus you get access to global earnings and get to capitalise on some of the major technology trends: artificial intelligence, machine learning, cloud computing, mobile ecosystems, and online commerce, to name just a few.
For some investors though, opening an international brokerage account is a hassle. Sometimes the paperwork comes in the way. I think it is a worthwhile pursuit and global investing, significantly, expands your investable universe. However, if international investing is not your cup of tea, then I have a few alternatives for you to consider.
You can consider investing in an exchange traded fund on the ASX that provides exposure to international equities. If that's something that piques your interest, I would suggest looking at the following: Morningstar Global Technology ETF (ASX:TECH), Betashares NASDAQ 100 (ASX:NDQ), iShares Global 100 ETF (ASX:IOO), and iShares S&P 500(ASX:IVV).
And finally, I would suggest looking at the international revenue component of ASX-listed companies. Several of them generate substantial portions of their income from overseas. I suggest adding Aconex Ltd (ASX:ACX), Corporate Travel Management Ltd (ASX:CTD), and ResMed Inc. (CHESS) (ASX:RMD) to your watchlist.
