One of the basic building blocks of a solid portfolio is investment diversification. Put simply, this means investors shouldn’t put all their eggs in one basket.
This is the main principle behind asset allocation, which involves spreading money across different asset classes and diversifying how to allocate money within each sector.
Making sense of today’s market headwinds and building a diverse portfolio should be key priorities for all those wishing to grow the long-term value of their wealth.
Spreading risk by diversifying
The basic principle underpinning asset allocation involves spreading money – and risk – across several structured products in a portfolio.
A diversified portfolio should typically include several broad investment categories. The allocation to each of these should be based upon:
- Individual investment goals
- Tolerance for investment risk
- The time horizon for accessing investments
A diversified portfolio
The four main asset classes are generally considered to be:
- Stocks and shares or equities
- Fixed income or bonds
- Money market or cash equivalents
- Property or other tangible assets
There are no right or wrong asset allocations. You need to find those that are right for you based on your own personal situation and investment goals.
Depending on your attitude to risk, your portfolio may include some or all these asset types, as they offer varying levels of opportunity and move in different ways to one another.
Different geographical areas
Holding funds invested in different geographical areas can further spread risk and protect investors from stock market corrections. However, there can be uncertainty regarding foreign currency exchange.
When sterling is weak, every pound invested will buy fewer foreign currency denominated investments but, if you already have overseas investments, lower exchange rates can be beneficial, as this will boost values.
Impact on returns
Unfortunately, investors can’t control the way the markets behave.
Investment fees are one of the most important differentiators that lead to the eventual outcome of an investor’s portfolio valuation. They can eat away at even the best-performing investments and have a big impact on future returns.
Independent professional financial advice advice can help control these costs so should be a consideration for all investors.
Important things to remember
Growing your wealth is not something that happens automatically.
Time – not timing, patience and making well informed decisions are key to building and sustaining a diverse and successful portfolio.
Things worth bearing in mind are:
- There will always be reasons not to invest, such as when the markets are volatile. One of the main arguments against trying to time the market is that mistakes can be costly. It rarely pays off and may lead to you missing out on gains while you wait for just that right moment to make an investment.
- Although timing is not a prerequisite, time is. For investors to have the best chance of earning a return, they need to cultivate the art of patience. Time in the market beats timing the market, almost always.
Whether it’s a lump sum you want to invest or a regular amount each month, your money should work in all the ways you want it to.
Your goal may be to grow the long-term value of your wealth to provide an income later in life or to pass it on to future generations. Whatever your individual requirements, we can support you in many different ways. Get in touch today to find out more.
Content correct at time of writing and is intended for general information only and should not be construed as advice