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What is diversification and why is it important in your KiwiSaver fund?

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Let’s say your KiwiSaver fund consists of only stocks within the mining industry. If the government announced that coal mining would be banned and that energy sources would now come from renewable energy, share prices of mining stocks will collapse.

Since you only have one type of industry in your investment portfolio, it will experience a great loss in value.

On the other hand, if your portfolio also consists of renewable energy stocks, then the positive performance of your renewable energy stocks will offset the negative performance of your mining stocks. This is diversification.

Explaining diversification in more detail 

Diversification is achieved by mixing a wide variation of assets within an investment portfolio. This variation should include different types of assets, industries, and countries as they would behave in different ways at different times.

You are exposed to different types of risk when you invest, including market risk, volatility risk, and diversifiable risk. Some of these risks can be minimised significantly by diversifying your investments. 

Diversifiable risk like the example above is unique to a specific company, industry, market, or country and can be considerably reduced through diversification.This investment strategy is essentially very similar to the old saying “don’t put all your eggs in one basket”.

How KiwiSaver funds diversify their portfolios

Like many other types of managed funds, KiwiSaver funds make it easier to manage risk by spreading your money across a range of different assets. For example, let’s take a look at the Milford Active Growth Fund.

 

Name of Holdings

% of Fund’s Net Assets

Spark New Zealand

3.82%

Fisher & Paykel Healthcare

3.77%

Summerset Group Holdings

2.36%

a2 Milk Company

2.12%

Contact Energy

1.94%

Newmont Mining

1.85%

Alphabet

1.82%

Dr Horton

1.78%

Charter Hall Retail

1.70%

Lowe’s Companies Inc

1.63%

                        Top equity holdings as of 31 August 2020 from Monthly Fact Sheet.

We can see that their top ten equity holdings consist of shares from many different industries from technology to retail in New Zealand, Australia, and the United States. By also investing in international shares in their portfolio, this KiwiSaver fund is able to minimise and offset the risks that come with only investing in shares from one country. Volatility in NZ might not affect the values of shares in the US, so investing in different parts of the world is important to further diversify your portfolio.

How can National Capital help?

Comparing KiwiSaver funds can be quite overwhelming due to the wide range of different options available. Our financial advisers at National Capital perform research into what investments these KiwiSaver funds are investing your money in. They do this by diving deep into the underlying investments of the funds, the country allocations, etc. This allows them to ensure that the recommended funds have a level of diversification fit for our clients.

We can help you structure a KiwiSaver investment plan tailored to your personal situation and goals. It is important to pick the right fund for you, so let’s start by taking our KiwiSaver HealthCheck to get professional advice and have one less money worry.

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We look at the asset allocation of KiwiSaver funds to ensure that you are investing in a diversified portfolio. Is your KiwiSaver fund diversified enough?
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