15th December 2018
Having an investment strategy is key when planning how to make your money work hard for you. Making the right decisions about where you invest can protect you from market dips but also prevent you from making large capital gains. This is where creating a diverse investment portfolio comes in to play. When considering portfolio diversification you should consider the current state of your assets and your tolerance of risk.
Whilst portfolio diversification does not offer sure-fire protection of your money, it can maintain the control you have of your capital over time. Every investment you make has a level of risk and diversifying your portfolio will help you increase the stability of your investments and decrease your risk of losing money in the event that a single area decreases in value.
They say don’t put all your eggs in one basket and this can be applied to investing. Spreading your money across different investment opportunities is key as each will have a different level of risk and profitability. Having and maintaining capital in as many different areas as possible will help create a stable portfolio that has a higher chance of increasing in value over time.
|Asset Class||Investment example|
|Cash||Savings, current account balances, Cash ISAs, savings or premium bonds|
|Bonds||Government bonds, overseas bonds, corporate bonds|
|Shares||Shares can be held directly or through an investment fund|
|Property||Residential, commercial, buy-to-let or property companies|
|Alternative investment||Art, antiques, wine, gold, jewellery|
As an investor, you will have a unique personal risk profile. When designing and diversifying a portfolio the level of risk you are willing to tolerate can be the focus. This means that all future investments can be tailored specifically to suit you.
Many new investors are fixed on generating large returns and often are under the illusion that one great investment will change their financial destiny. However, seasoned investors know that the greatest success will come from concentrated risk and portfolio analysis over time.
As portfolios mature, taking a look at the performance of your investments will help you make decisions for the future. You may also find that your investment goals or tolerance for risk have changed, meaning you may need to alter some of your investments. For example, some investors change tack if they have a new family or are approaching retirement.
Furthermore, as time goes on, you may cast your eye over a new asset class that appeals to you. Many investors who considered themselves traditionalists are now involved in peer-to-peer lending and cryptocurrency as the alternative investment world encourages investors to expand their portfolios.
Some investors feel particularly strongly about a specific asset class; some will favour investing in property solely whereas others will favour stocks and shares. For some investors, this works. However, you might want to consider diversifying your portfolio if:
Investors looking to achieve long-term goals will need to create their own ideal equilibrium between risk and reward – choosing the best investments for you and your level of risk, as well as rebalancing and analysing how your choices are performing well.