Investing is a tricky trade, and like any business decision it’s not without its risks. While there’s no way to guarantee your investment portfolio won’t fall short, there are steps you can take to prevent a significant financial loss. Speak to a professional investment management service before jumping into any decisions. An experienced investment manager will be able to perceive risks that can stop you from taking a step in the wrong direction, as well as provide better strategies to increase your chance of a higher return.
Diversifying your portfolio is one way of creating a contingency plan and reducing the risk of your assets dropping in value. If you have an investment manager, take the opportunity to ask for advice on how you can achieve a diverse portfolio. If you’re new to investing you may be wondering what diversifying is and how it can help. Read on to find out why you should diversify your portfolio and how to go about it.
Why it’s important to diversify your investments
Diversification is a technique used in investing to reduce risk, by allocating investments across a range of financial instruments, industries, and other categories. The aim is to maximise returns by investing in different sectors that would all have a different reaction to the same event. While diversifying cannot guarantee you won’t experience a loss, it is the most important aspect of achieving long-range financial goals while reducing unsystematic risk.
Failing to diversify your portfolio can result in a significant drop in revenue. For example, if you invested only in restaurants, the pandemic would have led to a drop in the value of your portfolio. However, if you invested in a food delivery service as well as some restaurants, a smaller percentage of your portfolio would have suffered.
Spread your investments around
Choose several different sectors or stocks to invest in, to ensure you’re covered if one of your chosen sectors is badly hit at any point. Spreading your risk around different areas can also help you to gain higher rewards in the future.
While it can be tempting to invest in hundreds of different things, ensure you keep to a manageable portfolio (around 20-30 different investments) and have the time and resources to keep up with these.
Utilise index or bond funds
Investing in securities which track a variety of indexes is a great way to diversify your portfolio long-term. Including fixed-income solutions will safeguard your stock against market volatility and uncertainty. Funds like these are often accompanied with low fees, due to lower management and operating costs. This is particularly beneficial if you want to spend a little less than usual.
Build your portfolio up
Ensure you add to your assets on a regular basis. Pound-cost-averaging can be ideal to smooth out any issues caused by a volatile market. The aim with this strategy is to reduce risk by investing the same amount of money over a longer period. This strategy will enable you to buy more shares when prices are low but less when prices rise.
Know when to let go
Keep on top of any changes in your markets and make sure you know what’s going on with the companies you’ve invested in. Staying ahead of the curve will help you to know where to make your next investment and when it’s time to move on.
Keep an eye on commissions
Ensure you understand what you’re getting for the fees you pay. Some firms charge a monthly fee, while others charge on a transactional basis. It may seem like small change at first, but these can quickly add up. Stay updated on your fees and any changes that are made to these, as over time these can affect your return on investment.
