A new report by Vanguard Investments has warned investors not to lose sight of properly diversifying their portfolio in the search for higher yield.
Generating a steady income has been on the mind of many investors during the current period of market turmoil, but ensuring long-term success in portfolio construction requires a proper assessment of the risk, liquidity and yield of any new asset class, according to Vanguard's ‘Desperately Seeking Yield' white paper.
"It's the human condition of letting emotions take charge in response to market events — both good and bad — which tempts investors to disregard time-tested investment principles," Vanguard principal and head of marketing and communication Robin Bowerman said.
Vanguard uses the example of the important role Australian equities play in generating dividend income. However, to offset the systematic risk the equities introduce, including other asset classes such as fixed income to moderate the volatility can be beneficial, the research found.
Bowerman said that in generating sustainable yield, it is best for an investor to focus on the total return on a portfolio rather than concentrating solely on maximising yield.
"Whether you are early on in your investing life or drawing on your portfolio in retirement, it is important to understand the value of strategic asset allocation and avoid trying to make short-term tactical decisions," he said.
