7 Ways to Diversify Your Portfolio Beyond Traditional Assets

Most of us want to grow our wealth as best we can, and for many people this begins with investing in shares, bonds or cash savings.

However, while these can play an important role in building your fortune, there is always a risk involved in relying on just one or two asset classes. Not least because it may leave your portfolio exposed if markets suddenly change. That is precisely why many seasoned investors champion diversification as a key part of their long-term investment strategies.

When you think about it, this concept really makes sense because looking beyond traditional assets opens the door to a wider range of opportunities. Each of which has its own level of risk and potential return. 

In this article, we'll look at seven ways investors can spread their investments across different asset classes. Hopefully, adopting a balanced approach that incorporates a few of them will prove financially beneficial for you.

Why Is Portfolio Diversification So Important?

Before we outline the opportunities, it is worth briefly mentioning why portfolio diversification is so important.

Essentially, it works on the principle that, instead of relying on a single asset class, you spread your money across different types of investments. The reason is straightforward. Different investments often perform very differently under changing economic conditions. For instance, shares may rise while property slows, or gold may perform well during periods when bond markets struggle. Subsequently, by owning a mix of assets, investors may reduce the impact that poor performance in one area has on their entire portfolio.

It is worth noting that diversification does not eliminate investment risk altogether, as every investment carries some degree of uncertainty. However, spreading investments across several asset classes may reduce the effect of market swings over the long term.

7 Ways To Diversify Your Portfolio

So, what are the best ways to diversify beyond the traditional assets of cash savings, bonds, and shares? Here are seven options you might want to consider.

1. Property

Property has long been a popular investment choice in Australia. Residential homes, commercial buildings and property investment trusts all offer different ways to gain exposure to the real estate market.

Many investors are attracted to property because it may generate rental income while also increasing in value over time. Property can also move independently from share markets during certain economic conditions, which is another reason to invest in it.

On the other hand, buying property usually requires handing over a significant amount of capital upfront. Additionally, there are also ongoing costs you will need to cover, including maintenance, insurance, council rates and loan repayments.

That said, for investors who would prefer a lower entry point, listed property funds might be a good option to explore. They offer exposure to the property sector without purchasing a physical building, which helps to reduce risk.

2. Cryptocurrency

Cryptocurrency has become one of the most talked-about investment categories of the past decade. However, because digital currencies are known for their price volatility, some investors allocate a small portion of their portfolios to this asset class.

Rather than replacing traditional investments, cryptocurrency is often viewed as one piece of a diversified portfolio. Indeed, many investors limit their exposure to an amount they are comfortable with while keeping most of their investments in other asset classes.

Anyone considering digital assets should take time to understand how cryptocurrencies work. It is also worth getting a handle on how they are stored, and the risks involved in investing in them. Reputable Australian exchanges such as bitcoin.com.au offer educational resources which make it easier for newcomers to learn about this market before investing.

3. Gold and Other Commodities

Gold has been viewed as a store of value for centuries. It is particularly popular during periods of economic uncertainty, when some investors turn to precious metals because they are considered a tangible asset.

Other commodities include silver, oil, agricultural products, and industrial metals such as aluminium. These markets are influenced by factors such as global supply, demand and economic activity. Hence, they often move differently from shares.

For some investors, commodities can provide a good layer of diversification. However, you should be aware that prices can also change very quickly.

4. Bonds

Bonds are sometimes overlooked because they usually produce lower returns than shares over long periods. Even so, they continue to play an important role in many people’s investment portfolios.

Government bonds are generally considered lower-risk because they are backed by governments. Corporate bonds, on the other hand, are issued by businesses and usually offer higher returns, albeit with greater risk.

Many investors use bonds to generate regular income and to reduce the ups and downs that can come with share market investing.

5. Infrastructure Investments

Infrastructure investments include assets that communities rely on every day. These may include airports, toll roads, ports, electricity networks and renewable energy projects.

Many of these assets generate income over long periods through user fees or long-term contracts. Because people continue to use these services regardless of economic conditions, it is entirely possible that infrastructure investments may yield relatively stable returns.

Individual investors can gain exposure to this asset class through listed infrastructure funds, or exchange-traded funds that hold a collection of infrastructure assets across Australia and overseas.

6. Private Equity or Venture Capital

Private equity involves investing in businesses that are not publicly traded on a stock exchange. It differs from venture capital, which focuses on newer businesses that have strong growth potential.

These investments may deliver attractive returns if a business performs well. However, they also carry higher levels of risk. Indeed, many young companies never achieve long-term success.

Private equity investments often require investors to leave their money invested for several years. Therefore, they might be less suitable for anyone who may need quick access to their funds.

7. Collectibles

Collectibles have become another popular option for investors looking beyond shares and property. Some notable examples include artwork, rare coins, vintage wine, classic cars, trading cards and luxury watches.

Occasionally, some collectibles increase substantially in value over time, particularly when they are extremely rare, or demand exceeds supply.

However, success in this market often requires specialist knowledge, which can be a barrier to entry. Determining authenticity, condition and market value can all be difficult for beginners.

In addition, collectibles may also be harder to sell quickly than shares or managed funds. So, you should always consider liquidity before making a purchase.