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The importance of diversity in your investment portfolio

Diversification is an approach to investing that involves allocating funds to investments that fall within different investment categories. Your funds may be invested across different industries across different areas of the global economy.

 

Why is diversification important?

The key goal of diversification is to maximise the potential returns of your investment portfolio. The various categories of investment will react in different ways to the same financial event. So by prioritising the diversification of your portfolio, this approach seeks to increase your returns and protect your overall investment portfolio against fluctuations.

As with all investments, there will always be an element of risk, without which your portfolio funds would be unable to grow. However, diversification plays a key role in making the most of your portfolio’s potential for growth in the longer term while protecting your funds from the impacts of any financial events that may occur within the global economy.

How does diversification work?

Some types of risk can be mitigated by the diversification of an investment portfolio, while other types of risk are systemic and cannot be managed through diversification. In some ways, this approach can seem complicated and there are expenses incurred, however, most finance professionals agree that it is a key tool for investors to achieve their investment goals. As with any approach that manages the potential risk to investments, the potential reward is also brought within certain parameters. As with all investment portfolios, decisions must be made by the investor with regards to the amount of risk they are able to tolerate with regards to their financial situation. 

 

The key takeaway

Diversification can play a key role in the management of investment risk and decrease the potential volatility of investment values. As important as this tool is, some systemic types of risk cannot be managed in this way and there will always be some element of investment risk. The goal for your investment portfolio is to achieve a balance between the return you wish to see on your investments and the level of risk you are able to tolerate.

Please get in touch with our team today to discuss more about your portfolio diversification.

 

6 common investment mistakes to avoid

Making investments can be a very exciting experience. Unfortunately, there are many mistakes that can be made when it comes to deciding what exactly you should invest in. Here we look at 6 common investments that you need to avoid to have a better chance of success.

 

Not knowing the industry

If you don’t know a business then how are you going to be able to accurately predict what their next move is going to be? If you’re interested in an investment opportunity but are a bit in the dark about the industry, make sure you do your research.

 

Heart over head

There could be an industry that you have a personal interest in or a company that you personally know or have an affinity to. You shouldn’t use these sorts of emotional questions to make your decisions, use your head instead of following your heart.

 

Not using your patience

There have been countless times when people have cashed out early only to find out that it was a terrible idea. Sometimes it can be tempting to snatch at an increase in share value rather than waiting to see how far it goes.

Not accepting the loss

On the opposite of patience, when people see the value fall they can often wait too long, desperate for it to get higher. You need to look at the reasons and make a solid judgment but sometimes it’s the best idea to accept a small loss and move on.

 

Not diversifying

If you’re an expert in one industry then you may be tempted to only invest in companies around that. The problem comes when there is an industry shift which can then affect all your investments. You want to spread them around to protect yourself.

 

Getting too emotional

It’s extremely difficult not to get emotional when it comes to your investments. If you’ve lost big then you always want to chase it and make everything right again. Instead, take time and analyze everything and don’t make any decisions in haste. It’s a simple step to take but one that at times can be easier said than done.

 

Top 5 tips for people starting to invest in 2019

When it comes to managing your money and saving for the future, investing is vital. However, successful investing is not always easy to achieve; with so many companies and schemes out there that are desperate for your money, how can you know where to place your funds? And what tactics can you use to ensure you get the most benefit from your investments?

 

Hopefully, this article will provide the answers you are looking for.

 

  1. Be open-minded

This is absolutely crucial. Successful investment requires you to do more than simply stick with industries you are already aware of; you need to branch out and explore a variety of opportunities. Focus on the future and speak to people that have knowledge of specific sectors and industries.

 

  1. Start small

It can be tempting to throw yourself into the investing game head-on, but rarely is this the best choice. Start off small, get a detailed understanding of the nature of investing, and then build up slowly.

  1. Stick with a strategy

Once you know what you’re doing and have acknowledged where you want your money to go, you have to come up with a strategy. And, once you do that, it’s essential to keep faith in your strategy. Long-term investing will see you encounter ups and downs, but the best way to achieve success is to stick with funds you believe in.

 

  1. Steer clear of penny stocks

It can be tempting to invest in penny stocks because they are so cheap and, therefore, it would initially appear that there is less to lose. However, this is not the case. Penny stocks are often a riskier prospect than higher-priced stocks because they do not tend to be as stringently regulated.

 

  1. Diversify

You are less likely to encounter significant losses if you spread your investments. By developing a portfolio, you will be able to invest in a number of funds or companies, and can subsequently track how they perform. Further down the line, you may want to put more money into a specific investment or move away from a particular company, but this should only be done after a lot of careful consideration.

 

Why diversifying investments is a crucial part of any strategy

There are a variety of choices when looking to make investments: across industries, types of assets and even in different locations. But conventional wisdom in finance is clear on the fact that investing in one or two of these exposes yourself to a higher level of risk.

Seasoned investors often choose a strategy that spreads their money across a range of investments in order to minimise risk. Here is how to invest in a way that helps you to find a balance between risk and return.

Understand that investments behave in different ways

Various factors are in play for different types of investments and these can include interest rates or general economic policy, as well as from conflicts and even natural disasters. A positive for one investment does not mean the same for the other and conversely, can occasionally lead to a negative outcome.

Because such a high number of factors are involved in determining how well our investments perform, it is important to diversify so that when one investment falls another may rise. The difference between your worst and best-performing assets is often huge which means it can be vital to diversify your portfolio.

 

Check where your investments are

If you have already started to dabble in the world of finance, such as in a stocks and shares ISA or in your pension, then you should be checking where your money is going. Should these funds be invested in a quite narrow selection then you could be taking on unnecessary risk.

When looking at changing this up, do not allow yourself to be tempted by the prospect of short-term returns on specific asset classes. Generally speaking, investments should take a long view and what is most important is the overall performance of your portfolio.

Remember: the asset class that performs best is liable to change each year and an individual asset class can vary wildly in how well it does from year to year.

Delegate to the experts if unsure

Even if you have the knowledge and free time to manage your portfolio, it remains true that paid professionals in finance have the tools and insight required to build a really good strategy. This can be in an already-built diversified fund but these are often tailored to individual needs.

 

Master the art of investment assets and risk

One of the main challenges facing a successful investor is predicting how different investments will perform. That’s because the money you get back depends on such a range of different factors, including how stock markets will perform. If you are thinking about investing, then it pays to understand the different types of assets that are available in relation to levels of risk.

 

More about assets

When securities or investments have similar financial characteristics, we describe them as falling into an ‘asset class’. There are four main types of asset classes:

  • Cash
  • Property
  • Shares
  • Fixed-interest securities (also called bonds)

If you want to manage the risk in your portfolio, you need to mix different types of assets you allocate your money to. This is known as ‘diversification’. In simple terms, you don’t put all of your eggs in one basket!

Low risk or high risk?

Every investor knows that the value of their assets can go down as well as up. Different types of assets present diverse levels of capital risk. Cash has a relatively low risk, whilst investing in shares carries the highest risk. So, if you are risk-averse you need to consider investing the highest proportion of your finance in cash. For instance, you could choose a cash ISA. If you are willing to gamble on high returns, you need to place a comparatively high proportion of your investment into shares. But you also run a higher risk of making a loss.

 

How do I decide?

If you want to rely on your investments to create a regular income, you might consider sticking with low-risk assets or broadening your portfolio to offset the chance of major loss. Often this is true for older people nearing retirement. However, if you are younger and have money to spare, you might want to take the challenge of incorporating a greater percentage of higher risk assets. Of course, this is a general view, and not individual advice.

 

I’m confused!

Experienced investors often build their own portfolios, but many of us are not quite so confident. Never fear, help is at hand! There are a range of investment funds which offer a ready-mixed allocation of assets. They can offer cautious and more aggressive alternatives depending on your approach to risk. This includes funds which shift their emphasis on risk as retirement approaches. Whatever your age, you are never too old to invest!