In this edition:

  Welcome

  Are you eligible for the low Company Tax      Rate?

  Capital Gains Tax changes for foreign              investors

  Novated Lease Arrangements: how to            reduce your tax liability

  The importance of diversification

We have all heard stories of that one person who made the big bucks buying that one lucky stock that took off, or holding an array of rental properties in the same town. The majority of the things we hear about involve large amounts of risk for a seemingly low initial return. Not everyone has large sums of capital to throw into the next big tech stock, or the financial stability to invest in one single asset class without putting the remainder of their wealth at risk (gearing). The base of the discussion here is your risk tolerance as an investor; this is your ability to see through the ups and downs in a portfolio.

Diversification is something we have all heard about, however, it seems we tend to stick to single assets as everyday investors because we may not understand the benefits associated with diversification.

The number one reason for diversifying is that it lowers your overall risk. The more you spread your assets out, the less likely it is that a single event will negatively impact your portfolio. If you have all of your investments in a single stock and that stock loses 50 percent of its value over the course of a year, you've just lost 50 percent of your portfolio. But if that stock only makes up 3 percent of your portfolio, a 50 percent drop-off won't affect you as much (1.50%).

The Graph below shows how diversification of growth and defensive assets affects the total return of the portfolio in relation to level of risk. Please note, the bond returns used in the graph are based on the Merrill Lynch 7-10 year US Treasuries index and the stocks used in the graph below are based on total return of the S&P 500 index from 1977-2011.