For many investors, uncertainty causes great anxiety – hold, buy or sell? There’s no one answer but there are some basic rules. Advanced economies are generally forward looking – trying to anticipate what’s to come and likely impact. It’s well publicised that a diversified balanced portfolio is the best way to achieve good investment outcomes but what does this mean in practice? Here are a few investment tips:
Spreading the risk
There’s no such thing as a risk-free investment, but a good way to reduce risk is by spreading your money between different types of investments (often referred to as assets or asset class).
If you invest too much in one company there’s an increased risk of losing some or all of your money so – investing in different types of asset – for example; shares, bonds and property – will help to reduce risk. If you go further and diversify within your chosen asset class – for example – large and small companies, different regions of the world and sectors (healthcare, industrials, technology etc), ensures a well-balanced portfolio.
The importance of diversity
For many investors one of the most time and cost-efficient ways to achieve diversity is by investing in ‘funds’. If you put your money into an investment fund you’re spreading your money and reducing the risk of a single company performing badly. A fund works with a fund manager investing money from lots of individuals into a wide range of assets (UK shares, overseas shares, bonds, property etc).
Two main types of investment funds are – active funds which are managed by a professional manager or index tracker funds which track the performance of a stock market or index such as FTSE 100.
Think about a core-satellite investment strategy. As a core-satellite investor you’ll hold a main core of investments (a mix of funds) and smaller satellites (a few stocks) that you think will do well longer term.
The principle behind this strategy is to achieve greater returns with a relatively-lower level of risk by holding a diverse well thought out portfolio. Below is just one example:
Please always remember that investments can go down as well as up, so you may get back less than you invest.