Imagine it’s 2012; you are 63 and just freshly retired from a long career with moderate financial success…
Your super consists of 5 taxi licences, all of which are rented giving you a reasonable return with no maintenance costs. In 2012, licences were in excess of $400,000 so you probably thought to yourself “Great! $2M in super, house all paid off – retirement is good.”
Fast forward to 2017 – Uber has arrived and the value of licences has tumbled.
Today at best they are worth $100,000 and in total your investment is now worth at best $500,000. Worse still, rents for licences have tumbled and now you are 68. All of a sudden retirement is not that great.
From being comfortable, you are now concerned that your super won’t last as long as you do. Worse still, because of your age you can’t go back to work and top up your balance.
This is an extreme example, but still very relevant. The point is, things can and do happen in investment markets, positive and negative.
Diversification into other markets and assets allows your portfolio to absorb negative shocks. If this poor chap for instance had only 1 licence, with the remainder in shares and property, his portfolio of assets may now be worth $1.7M rather than $500,000 and his outlook much more pleasant.