Australian investors have endured a rollercoaster 18 months with panicked lows and now record highs.

But, for every ebb and flow of the natural market cycle, there are strategies available to assist with smoothing investment returns over the long-term.

The majority of our clients are trying to achieve a specific goal – or goals – and are mostly concerned about ensuring they achieve this with a minimum amount stress. Hence a need for more consistent and reliable returns.

Over the past 20 years, for an atypical diversified portfolio (comprised of 35 per cent in Australian shares; 25 per cent international shares; 10 per cent property; 25 per cent in fixed interest; and 5 per cent in cash), each asset class had a turn in being the best and worst performer.

It proves that one of the most important principles of investing is to ensure you have a diversified portfolio. In practical terms, this means spreading capital among different investments so you’re not reliant on a single investment for returns. The key benefit of diversification is it helps minimise risk of capital loss to a portfolio.

Other key advantages of diversification include preserving capital, particularly as not all investors are in the accumulation phase of life, and also generating returns, with some investments not always performing as expected.

A diversified portfolio should include a mix of growth and defensive assets. Growth assets include investments such as shares or property and generally provide longer term capital gains, but typically have a higher level of risk than defensive assets. Conversely, defensive assets include investments such as cash or fixed interest and generally provide a lower return over the long term, but also generally a lower level of volatility and risk than growth assets.

Determining when to use long-term and short-term investments as part of an overall wealth strategy will help investors to reach their goals. Long-term investments are generally assets like stocks and real estate that you plan to keep for a while, and provide opportunities for growth in a portfolio because you don’t need to access the money for a significant period of time.

As the name suggests, short-term investments are those you plan to use to meet financial goals within a shorter time frame. You may need the money to provide a stable income source, rather than to build an investment portfolio. Short-term investments might include assets like bonds, cash, and annuities.

Of course, people re-evaluating their financial strategy should discuss any changing needs and circumstances with their financial adviser, who will also ensure their portfolio is sufficiently diversified to withstand future market volatility.

This article was published in the 2021-22 Summer Issue of Financial Times.