What is diversified investing?
The great British summer: Flash floods, blistering heatwaves, chilly mornings and stifling nights. It’s quintessentially British of me to talk about the weather, but meteorology is always a hot (and cold and wet) topic in the summer. With both the umbrella and ice-cream industries alternately booming over the last few weeks, which would you back as an investor? Would you plough all of your money into the assumption that temperatures will continue to rise, or write this season off as a wash out?
Diversified investing is where you shield your investments from huge losses by placing money in a variety of differing stocks and shares.
As a Chartered Financial Planner, I do not advocate gambling, especially when it comes to your investments. Where investors get burnt is when the try to guess market performance. Even the savviest and most weather-beaten investors will tell you that their guesses, regardless of how well informed, do not always pay off. Spinning the roulette wheel with your investments is seriously risky business and could cost you large portions, if not all, of your wealth and future security.
So, what is the best strategy if you want to achieve investment growth? Sadly, there is no guaranteed solution, as markets will always go up and down and so will your investments. However, there is one strategy that will help you to weather these fluctuations: A diversified portfolio; also known as an ‘efficient portfolio’ (you may see where the inspiration for our firm’s name came from!)
The best way to explain diversification is to revisit our earlier analogy of umbrellas and ice-cream. If you were to buy shares in both an umbrella manufacturer and an ice cream producer, you should, theoretically, do well in any British summer. You effectively ‘hedge your bets’, or, to use a time-old cliché, make sure you don’t put all of your eggs in one basket.
Research has shown that with a diversified portfolio, you can get better returns for any given level of risk, or get the same returns by taking less risk, when compared to an inefficient portfolio. The trick is to blend different assets together, like shares, property, bonds, cash and commodities in a way that gives you the best possible returns for a level of risk you are comfortable with. As one asset is going down, hopefully another is going up, so balance is retained in your portfolio, come rain or shine.
By diversifying your investments, you could see steady and consistent results, which is a far more prudent approach than chasing fast gains that could lead to even faster losses.
Whilst selecting the asset allocation for your diversified is probably the most important investment decision you will need to make, no one decision will be right forever; your strategy needs to evolve with you and the economic environment over time. It needs to be continually reviewed and revisited to ensure longevity and suitability.
If you worried your investments aren’t efficiently spread, or you are fed up with low interest rates in the bank being eroded by inflation, we’d be delighted to help. Email [email protected] or call 01572 898060 to have a chat with one of our financial planners to see if they can help you.
