Investing Money
How to divide up your Investment Portfolio
There is no one investment strategy that right for investing money and your decisions on how to divide up your investment portfolio into different types of investment will change over time. If appropriate to your particular situation, now may be a good time to reconsider your attitude towards risk for return and give some thought to whether the structure of your portfolio is still in line with your wishes or whether your investment attitude has changed.
You also need to bear in mind any other changes in your personal
circumstances that could impact your selection of stocks. It's
generally accepted, for example, that as people approach retirement
age the balance of their portfolio tends to switch away from
capital growth stocks towards those that provide a source of
income. Also, if you are planning to buy an annuity, you are likely
to want to reduce volatility.
It's important, too, to check that any price limits or targets you
may have set yourself are still at a level with which you are
comfortable. In addition, consider how best to monitor the
performance of your portfolio going forward.
Balanced Portfolio
You should review the weighting and balance of the constituents of your portfolio. Above all, there is the importance of diversification, both geographically and between sectors, even between asset classes and the weightings you wish to keep in each part of your portfolio. Not having all your eggs in one basket means if one part of your portfolio underperforms, this could be compensated for elsewhere.
The process of deciding what proportion of your portfolio should be invested in different types of investment is called 'asset allocation'. The four main asset classes are:
- Equities
- Bonds
- Cash
- Property
These asset classes have different characteristics for risk. There is a wide variety of different asset classes available to invest in and commensurate risks attached to each one. While these implicit risks cannot be avoided, they can be mitigated as part of the overall investment portfolio by diversifying.
Different investments behave in different ways and are subject to different risks. Saving your money in a range of assets helps reduce your exposure should one of your investments suffer a downturn.
Diversify
There is also a need to diversify within each type of investment. This is especially important in the case of share and bond investing, but can even be true of cash, where the risks are generally lowest.
By spreading your investments over a wide range of asset classes and different sectors, it is possible to avoid the risk that your portfolio becomes overly reliant on the performance of one particular asset. Key to diversification is selecting assets that behave in different ways.
Some assets are said to be 'negatively correlated' - for instance, bonds and property often behave in a contrary way to equities by offering lower, but less volatile returns. This provides a 'safety net' by diversifying many of the risks associated with reliance upon one particular asset. It is also important to diversify across different 'styles' of investing, such as growth or value investing, as well as across different sizes of companies, and different sectors and geographic regions.
Growth stocks are held because investors believe their value is likely to grow significantly over the long term, whereas value shares are held since they are regarded as being cheaper than the intrinsic worth of the companies in which they represent a stake. By mixing styles that can outperform or under-perform under different economic conditions, the overall risk rating of the investment portfolio is reduced. Picking the right combination of these depends on your risk profile, so it is essential to seek professional advice to ensure that your investment portfolio is commensurate with your attitude to investment risk.
The important thing to remember is that with investments, even if your investment goes down, you will only actually make a loss if you cash it in at that time. If you are going to invest, you need to be prepared to take some risk and also be prepared that you may see some falls in the value of your investments.
Currency and Inflation
You should also be aware of currency risk. Currencies - for example sterling, euros, dollars and yen - move in relation to one another. If you are putting your money into investments in another country, then their value will move up and down in line with currency changes as well as the normal share-price movements.
Another consideration is the risk of inflation. Inflation means that you will need more money in the future to buy the same things as now. When investing, therefore, beating inflation is an important aim.
A Personalised Investment Strategy
For mor information on investing money and developing a personalised investment strategy, talk to the independent investment advice team from one of our partner firms today for a no obligation investment consultation.
ABOUT TRUST ONLINE