Expand & protect your investment portfolio
It might sound obvious, but a good starting point to devising your investment portfolio is to really think about what you want to achieve. Are you investing for a specific purpose, or to generally grow your wealth? What time frame do you have? This will also help drive out how much risk you’re willing to take in pursuit of investment rewards.
1. Know what do you want
Remember, one size doesn’t fit all – it may be that you’re happy to invest some of your portfolio in more speculative projects, with the potential for greater rewards, whilst keeping a proportion in lower risk investments. Having a clear idea of your investment strategy is vital.
2. Assess and allocate
Once you know how much risk you want to take you can start thinking about asset allocation. This is essentially how you carve up your portfolio between the different asset classes (such as equities, fixed income, commodities, and property). Each of these asset classes will have different characteristics; typically, they will have different levels of risk and deliver returns at different stages of the economic cycle. A professional approach tends to be to determine a percentage weighting to allocate to each one, and then to use it as your investment roadmap.
3. Diversification, diversification, diversification
The golden rule of investing, diversification is best described as not putting all your eggs in one basket. As well as helping to lower the risk of your overall portfolio, spreading your money between lots of different assets opens your money up to more opportunities – after all, you’ve got to be in it to win it. Diversification can go down to a molecular level. For example, even within the equities sector (stocks and shares), you could invest in a variety of different sized companies, different industries, and different types of business – from start-up enterprises to well-known, high-street names.
4. Take a step back
One of your investments has grown by a huge amount! Great, but have you taken a step back? Making gains in one area could mean you end up with a larger proportion of your money in that investment than you set out in your roadmap (see point two), which could subject you to more risk should it turn bad. Once your portfolio’s built, it’s essential to review it regularly to keep it in shape.
5. Take a long-term view
Another popular investment saying, successful investing is often about time in the market, rather than timing the market. Even investment professionals struggle to know when is the best time to buy or sell a particular asset, and selling an asset when it’s underperforming could mean crystallising your losses, just before the price picks up. You could find that by sticking with it over a reasonable time period and not worrying about the interim ups and downs, you benefit from more gradual growth over time.
6. Think strategically
Whilst bearing in mind points four and five above, there may be times when you’ll want to make strategic moves in your portfolio, to benefit from growth in certain sectors. The key here is not to get carried away, and to ensure your portfolio continues to be well diversified (point three).
7. Ask the experts
No investor (even the most knowledgeable) can be an expert in all sectors, industries and asset classes at all times. Look for professional investment firms who have expertise in key areas and will work to identify opportunities on your behalf. They’ll usually conduct research into these opportunities (due diligence) to ensure the prospects are good, lowering the risk for you.
8. Consider an alternative
Alternative investments are best described as opportunities which don’t fall into the mainstream financial markets. Alternative investments can add power to your portfolio, enabling you to benefit from more niche areas that aren’t the staple of big corporations, and helping you to diversify your portfolio further in order to reduce its overall volatility. (To find out more information about alternative investments click here)
9. Inflation – why bigger isn’t better
Rising inflation can have a significant impact on your wealth. For example, keeping your money as cash might sound secure, but if it’s not growing, its true value goes down over time as the costs of products and services increase. Some asset classes, such as commodities and property, can offer protection against inflation, so your investment is more able to hold its worth. (To read more about The Backlash of Low-Interest Rates And Rising Inflation click here)
10. Get physical
Investments that are reinforced by a physical asset can often be seen as safe havens in volatile times – for example, many investors will buy up precious metals, such as gold, when markets look uncertain. Putting your money in property also gives the added peace of mind of knowing that your investment is underpinned by bricks, mortar, and land (a commodity which is in limited supply, and therefore always likely to be in demand).