The average investor's most important concept

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Wednesday 6 October 2004

From the school of modern portfolio theory, diversification is possibly the most important investment concept for the average investor.

By The Landlord

The biggest mistake investors typically make is over exposing themselves to a particular asset class, skewing their asset allocation inappropriately.

For New Zealanders, the most common situation is investing a disproportionately large component of their investment assets in residential rental properties.

The tangibility of "bricks and mortar" has obvious appeal for the conservative investor, but one must consider the principle of diversification to maximise return relative to risk. The first step in diversifying your investment portfolio is to determine the appropriate asset allocation.

For many New Zealander's diversifying means reducing their exposure to income assets like cash, fixed interest and residential property and increasing their exposure to growth assets such as domestic and international equities. Often there is a reluctance to take this step, however a staggered or progressive approach often allays any uncertainties or fears. It is these fears that determine your tolerance to market volatility and in turn your asset allocation. The key question then becomes what is the ideal asset allocation?

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