16th September 2019
Making good choices with your life investments One of the golden rules of investing is to spread your money across a range of different asset classes. We’ve all heard the expression, ‘Don’t put all your eggs in one basket’. This approach means that if one or more of your investments rise you will benefit but, if they fall, there should be a degree of protection because, hopefully, some of your other holdings in different asset classes will be going up in value.
Reducing overall risk
However, diversifying doesn’t mean shortening the period of time over which you invest. You should be thinking long-term (a minimum of at least five years or even longer) for all your investment allocations. Diversification means making sure you’re not relying on one type of investment too heavily. This helps to protect your investments and reduce the overall risk of losing money.
There are four main asset classes – cash, fixed-interest securities, property and equities – and having exposure to them all will help reduce the overall level of risk of your investment portfolio. If one part of your portfolio isn’t doing well, the other investments you’ve made elsewhere should compensate for those losses.
Investing in just one company is extremely risky, because if it doesn’t perform you’ll lose money. Investing in lots of companies means that even if one does badly, others may do well, limiting your losses.
You can further diversify your portfolio by spreading your investments over several geographical areas. If you invest in companies from different countries then even if, say, manufacturing is performing poorly in the UK, it might be flourishing in the Far East.
You can take this up another level by investing in different sectors. And so if manufacturing underperforms in several countries at once, other sectors you’re investing in could be outperforming their markets.
Make sure you are comfortable with the risks involved when investing in different regions. For example, emerging markets such as Brazil, Russia, India and China are likely to be more volatile than developed markets such as the UK and US.
Regular investing can also help to reduce investment volatility, known as ‘pound cost averaging’. When there’s a stock market correction, your regular monthly amount acquires more shares or units with the fund. When markets rise, fewer shares and units are purchased. This reduces the risk of putting a large sum into the market at the wrong time.
Some parts of your portfolio are likely to perform better than others at various times, which is why it’s important to review your entire portfolio and rebalance it if outperformance in some areas means that you are now too heavily invested in one area of the globe or one asset class.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS.
ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.