Diversification percentage?

I was recently on a foreign investment forum. The owner is a journalist in a money magazine. He commented on my asset allocation. It was suggested that the minimum I invest in one asset should be 5% of total moneys. Any less, had little effect on lowering risk on my portfolio. The smallest I have is 1%. Is this guy right?



Thanks, Johny.

 

Hi Johny,

The way to lower risk is by investing in low correlated assets, this smooths the ups and downs a portfolio will have.

Typically Australian shares are highly correlated to US shares (eg, the US market goes up overnight then generally the local market will also go up that day), on the other hand Shares in general are inversely correlated to Bonds.

You can read more here Asset Correlations

Cheers,

Dan

PS This is general information and you should discuss with your investment specialist before making an investment decision.

 

David Swensen, in Unconventional Sucess, explains that for an asset class to have any diversification effect it should at least be 5% of the total portfolio.

Should I be expanding my tiny holdings?




Thanks, Johny.