It’s time for another episode of “Why Diversification Is Your Best Friend!”
Markets have been having a pretty good run again this year with many major indices recording gains of 10-20% so far.
Fantastic news if you’re invested in those markets because returns are much better than bank interest and there’s been no stress in guessing which specific shares will go up or down.
Despite those healthy market returns the reality is a rising tide doesn’t lift all boats – even some of the harbour’s most impressive boats.
There have still been many companies around the world underperforming against the market.
Computer giant IBM is one; valued around $200 billion IBM has had a lacklustre year, down 6.5%, while its benchmark, the Dow Jones Industrial Average is up over 19%.
Caterpillar is another example of a large well known company dragging against the Dow Jones – it’s down over 10% this year.
Across the border in Canada you can see the benefit of diversifying beyond your own country as the Toronto Stock Exchange (TSX) lags US markets with a 7.3% return for the year.
The TSX is home to the world’s largest gold miners, GoldCorp and Barrick Gold, who have both lost around 50% of their value this year, who, with oil companies, form part of the reason the TSX is lagging.
Even so, if you were a Canadian you could have bought your local index and harvested a 7% gain – a better option than volatile gold miners who some analysts said were a buy!
It’s a similar story back in Australia; gold miner Newcrest has fallen 60% while its bench mark the ASX 50 is up 15%.
Other notable companies diverging from the index are Worley Parsons, down 8% (pre a 25% fall on Wednesday); Orica, down 7%; and Coca Cola down 8.5%.
Proving a portfolio full of great looking companies in good times can still give you bad looking returns.
Real diversification comprises a variety of different funds full of thousands of companies from Australia and around the world.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Searching for the top financial adviser in Australia?
