Diversification can help reduce volatility

No single asset class, investment manager or security provides the best performance over all time periods. As the returns from different asset classes, investment managers and securities will be different at any time, by investing broadly your overall return will tend to be less volatile. This is called "diversification" and is a common way of reducing volatility.

This concept is illustrated in the following simple graph. If you invested in shares your returns over time are shown by the red line. If you invested in Bonds your returns would have been the blue line. By investing half of your portfolio in each, your return would have been straight down the middle of the returns of each of the asset classes, and is shown with a green dotted line. The returns of Shares and Bonds offset each other and the combined return is therefore less volatile.

Therefore it's important to have a range of investments in your portfolio, so strong performance from one asset class, investment manager or security can counter weak performance from another.

MLC diversifies its portfolios extensively at three levels:

• across asset classes
• across investment managers and
• across securities.