Dec 07, 2023  | Tags: diversification, wealth, high income

Our insights 

Diversification.

You’re no doubt familiar with one of the great buzzwords of investing and understand the basic concepts.

But for high income earners, its application is even more critical.

That’s because high income earners have much more to gain – and much more to lose.

Spreading risk through strategic portfolio diversification is a fundamental principle of sound financial management.

Here’s why it is so important, as well as some methods that can be utilised to support diversification.

Why diversify?

Many high-income earners hold a substantial portion of their investment in one specific asset or class.

For example,  maybe shares have been acquired in the company where they are employed.

But if that company suffers a setback, so too does a significant share of their investment plan.

Hence diversification mitigates concentration risk.

It also has the following benefits:

Preservation of wealth 

Diversification reduces the impact of poor-performing assets and creates financial stability and resilience, especially against unforeseen events.

Dependence reduction 

Investing in multiple asset classes negates the reliance on one single asset, industry or geographic region for wealth accumulation.

Reliable investment returns 

Spreading investments across all asset classes and sectors produces more consistent and predictable returns.

Greater flexibility 

A diversified portfolio offers greater flexibility, allowing adaptation to market changes as various asset classes respond differently to economic events.

Risk management and loss aversion 

Higher income earners may have a lower risk tolerance due to the impact on their lifestyle and future goals. Diversification manages risk and overcomes loss aversion.

Enhanced wealth opportunities 

Diversified portfolios have the potential to capture returns from a wider variety of sources.

Risk-adjusted returns 

If your risk profile changes, a diversified portfolio offers much greater leverage, allowing you to optimise risk-adjusted returns. 

How to diversify

There are a whole suite of strategies which can be employed by high income earners to diversify their portfolios.

Most of them are aimed at increasing their portfolio’s stability while adding a variety of asset classes with the intent of maximising returns.

They attempt to give investors the best of both worlds while potentially improving after tax returns by maximising capital gains discounts.

Core and satellite approach

This strategy establishes a core portfolio with broad market exposure through low-cost index funds or ETFs that also offer tax efficiency and lower volatility.

It then adds satellite holdings in specific sectors or regions for additional opportunities.

These actively managed funds or other direct investments provide the potential for greater performance.

Global diversification and currency considerations

You may reduce your risk profile with global diversification while investing heavily in the Australian market.

Be mindful to watch currency fluctuations and consider and react to how movement in foreign exchange rates may impact your portfolio.

Alternative investments

Consider diversifying your portfolio with alternative Australian investments.

These include assets such as real estate investment trusts (REITs), infrastructure funds and private equity.

Assess the benefits of adding other non-traditional assets such as commodities, cryptocurrency and collectibles such as wine and art.

Leverage tax-advantaged retirement accounts

No investor should overlook this free hit from the ATO and high-income earners are no different.

It’s important to maximise contributions to tax-advantaged retirement accounts such as your superannuation.

Take advantage of concessional contribution limits to build a tax-effective retirement strategy.

Get advice today

Diversifying your portfolio is critical for every investor but none more so than those on a high income with significant assets.

Failure to diversify leaves your wealth vulnerable to market forces.

You may also be failing to take advantage of tax benefits which can be leveraged.

If you are concerned about your risk exposure or want to revisit your strategy, Calder Wealth Management can help.

CWM works with numerous high-income clients who work in demanding roles that leave them little spare time to manage their portfolios.

We are wealth experts with a focus on strategy and managing risk.

No-one should do without a quality investment portfolio professionally managed by a team personally engaged in their wealth accumulation.

We pride ourselves on leading our clients into the future with structure, financial stability and confidence.

Contact us today to discuss all of your financial needs and concerns.

Written by Anthony Hill.

The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.