‘The only free lunch in finance’: Why it pays to be diversified
By Vanguard
Investing strategy
The power of diversification
Nobel Prize-winning economist Harry Markowitz famously quipped that diversification is “the only free lunch in finance.”
Having a diversified mix of investments, appropriate for your goals and risk appetite, can help you weather the ups and downs of markets.
It’s why “balance” is one of Vanguard’s four principles for investing success.
Vanguard’s range of ETFs, managed funds and superannuation investment options can help you diversify your portfolio across a range of asset classes and geographies.
That’s important because it’s very difficult to consistently pick which asset class will perform the best in any given period.
How different asset classes performed in 2024
Annual asset class returns for the year ended December 2024
This chart is based on analysis by Vanguard’s Investment Strategy Group of major asset class returns.
In 2024, international shares (hedged) were the best-performing asset class, delivering a positive return of 20.7%. This marks the second consecutive year that this asset class topped the list, following a 21.7% return in 2023.
The worst-performing asset class in 2024 was international fixed interest (hedged), which returned 2.2%.
Hedging refers to strategies used to reduce the risk of currency fluctuations impacting the returns of international investments.
Why it can be dangerous to follow recent winners
However, the situation was quite different in 2022, a challenging year in the markets.
That year, international shares (hedged) experienced a loss of 18.1%. The best-performing asset class was cash, returning 1.3%, followed by Australian shares (-1.8%) and Australian fixed interest (-9.7%).
The worst-performing asset class that year was hedged international property (-23.9%).
The vastly different results of 2022 and 2024 show how diversifying investments across asset classes and countries can help investors reduce overall portfolio volatility and guard against unnecessarily large losses.
How Vanguard’s multi-asset ETFs make diversification simple
Vanguard offers a variety of diversified ETFs, providing investors with access to multiple asset classes and sectors in a single fund tradeable on the ASX.
These products combine thousands of Australian and international shares, bonds, and other assets in different proportions to suit a range of investment objectives, risk profiles and investment time frames.
Here are Vanguard’s diversified ETF product options.
- The Vanguard Diversified Conservative Index ETF (VDCO) has a 30% allocation to growth assets (such as shares) and 70% to defensive assets (such as fixed income).
- The Vanguard Diversified Balanced Index ETF (VDBA) has a 50% allocation to growth assets and 50% to defensive assets.
- The Vanguard Diversified Growth Index ETF (VDGR) has a 70% allocation to growth assets and 30% to defensive assets.
- The Vanguard Diversified High Growth Index ETF (VDHG) has a 90% allocation to growth assets and 10% to defensive assets.
- The Vanguard Diversified All Growth Index ETF (VDAL) has a 100% allocation to growth assets and 0% to defensive assets.
- The Vanguard Diversified Income ETF (VDIF) targets a 60% allocation to growth assets and a 40% allocation to defensive assets.
Whichever strategy you choose, it’s important to focus on the core fundamentals of an appropriate asset allocation for your goals and risk appetite, rather than be distracted by market movements and individual security performances.
Notes for the graphic: Australian equities is the S&P/ASX 300 Index; Australian Property is the S&P/ASX 300 A-REIT Index; International Property Hedged = FTSE EPRA/NAREIT Dev x AU Hedged into $A from 2013 and UBS Global Investors ex Australia AUD hedged index prior to this; International Shares Hedged is the MSCI World ex-Australia Index Hedged into $A; Emerging Markets Shares is the MSCI Emerging Markets Index; Australian Bonds is the Bloomberg Ausbond Composite Bond Index; Global Aggregate Bonds = Bloomberg Global Aggregate Index Hedged into $A; Cash = Bloomberg AusBond Bank Bill Index.
Important Information
All investing is subject to risk, including the possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure profit or protection against a loss.