Another year of varied returns demonstrates the importance of diversification.
Global share markets surged into record territory during 2024, delivering double-digit returns to many investors.
Indeed, investors using broad-based exchange traded funds (ETFs) to cover the largest companies on U.S. and international share markets would have ended the year with significant gains.
By contrast, total gains from the Australian share market were more subdued. However, they were still above 10% for the year and well ahead of the returns from many other asset classes.
The table below draws on data from the Vanguard Digital Index Chart to show what a $10,000 investment into eight major asset classes at the start of 2024 would have grown to by the end of 2024.
| Asset class | Dollar value at the end of 2024 |
2024 total return (%) |
| United States shares | $13,778 | 38.8 |
| International shares | $13,118 | 31.2 |
| Australian listed property | $11,850 | 18.5 |
| International property | $11,190 | 11.9 |
| Australian shares | $11,144 | 11.4 |
| Cash | $10,447 | 4.5 |
| Australian bonds | $10,293 | 2.9 |
| International bonds | $10,185 | 1.8 |
Source: Vanguard.
Note: Returns data measured from 1 January 2024 to 31 December 2024.
Past performance is not a reliable indicator of future performance.
The projections above indicate how much could have been accumulated if it were possible to invest directly into the relevant indices. They assume the $10,000 is fully invested (and remains fully invested) in the relevant index for the asset class and that all income is reinvested. They do not make any allowance for fees, costs or taxes. All results are displayed in nominal dollars, i.e. inflation has not been taken into account.
An actual investment would be subject to acquisition costs, fees and taxes.
The figures are based on assumptions and are general illustrations only.
A diversified portfolio allows you to adapt to changing market conditions and economic environments.
What’s obvious from the data is that there was a massive gap between the return from the best-performing asset class (U.S. shares) and the worst-performing (international bonds).
Yet, as is so often the case, last year’s best-performing asset class may not be the best performer in the following year. And that highlights the importance of being diversified across multiple asset classes as a key strategy for building a robust and resilient investment portfolio.
Seven key benefits of diversification
1. Risk reduction
One of the primary advantages of diversification is the reduction of risk. By spreading your investments across different asset classes, you minimise the impact of a single asset’s poor performance. For example, while U.S. shares saw a solid return of 38.8%, international bonds only returned 1.8%. If you had invested all your money in international bonds, your returns would have been much lower. Diversification ensures that even if one asset class underperforms, stronger performers can help lift your overall investment return.
2. Stability and consistency
Diversification helps to smooth out the volatility of the market. By investing in a mix of asset classes, you may achieve more stable and consistent returns over time. This is particularly important for long-term financial goals, such as retirement. For instance, while U.S. shares and international shares provided high returns, Australian listed property and Australian shares also contributed positively to the portfolio, offering a more balanced approach.
3. Opportunities for growth
Different asset classes can perform well at different times. By diversifying, you could increase your chances of capturing growth opportunities and ensures you are not missing out on potential gains from asset classes you have avoided.
4. Inflation protection
Some asset classes, such as real estate, can act as hedges against inflation. When the cost of living rises, these assets often increase in value, helping to preserve your purchasing power. Australian listed property, which can be seen as a proxy for real estate, provided a solid return of 18.5% in 2024.
5. Flexibility and adaptability
A diversified portfolio allows you to adapt to changing market conditions and economic environments. You can adjust your asset allocation based on your risk tolerance and financial goals, ensuring that your investments remain aligned with your needs. For example, if you are nearing retirement, you might shift more of your portfolio into bonds and cash to reduce volatility risk.
6. Enhanced return potential
While diversification doesn’t guarantee higher returns, it can potentially enhance your overall return by taking advantage of the strengths of different asset classes. In 2024, a diversified portfolio that included U.S. shares, international shares, and Australian listed property would have seen significant growth, outperforming a portfolio concentrated in a single asset class.
7. Emotional comfort
Knowing that your investments are spread across various asset classes can help you avoid the stress and anxiety that come with putting all your eggs in one basket, making it easier to stick to your long-term investment strategy. For instance, the more consistent returns from cash and Australian bonds may provide a sense of security when more volatile assets such as shares experience volatility.
Conclusion
The data from 2024 clearly demonstrates the power of diversification.
By spreading your investments across different asset classes, you can reduce risk, achieve more stable returns over the long term, and potentially increase your chances of capturing growth opportunities.
Whether you are a seasoned investor or just starting out, diversification is a strategy that can help you build a resilient and balanced portfolio, ultimately contributing to your financial success and peace of mind.
Important information
Diversification is no guarantee of investment success or loss avoidance. A diversified portfolio could produce negative returns if markets fall. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your portfolio. 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 incomeThis article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing™ GENERAL ADVICE WARNING Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (VIA) is the product issuer and operator of Vanguard Personal Investor. Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270) (the Trustee) is the trustee and product issuer of Vanguard Super (ABN 27 923 449 966). The Trustee has contracted with VIA to provide some services for Vanguard Super. Any general advice is provided by VIA. The Trustee and VIA are both wholly owned subsidiaries of The Vanguard Group, Inc (collectively, “Vanguard”). We have not taken your or your clients’ objectives, financial situation or needs into account when preparing our website content so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for the product before making any investment decision. Before you make any financial decision regarding the product, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained on our website free of charge, which includes a description of who the financial product is appropriate for. You should refer to the TMD of the product before making any investment decisions. You can access our Investor Directed Portfolio Service (IDPS) Guide, Product Disclosure Statements (PDS), Prospectus and TMD at vanguard.com.au and Vanguard Super SaveSmart and TMD at vanguard.com.au/super or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This website was prepared in good faith and we accept no liability for any errors or omissions. Important Legal Notice – Offer not to persons outside Australia The PDS, IDPS Guide or Prospectus does not constitute an offer or invitation in any jurisdiction other than in Australia. Applications from outside Australia will not be accepted. For the avoidance of doubt, these products are not intended to be sold to US Persons as defined under Regulation S of the US federal securities laws. © 2024 Vanguard Investments Australia Ltd. All rights reserved.
