Investment diversification is the key

Wednesday, 26th May 2010 17:48 - by Resident IFA

Volatility...not Grease...has been the word over the last few days in relation to the Stockmarket. As a Private Investor – not a Trader (day or otherwise) – run for the hills! But seriously, this is where the following might come into their own:  Time horizon  Attitude to Investment risk  Diversification of assets aka ‘Asset allocation’ Time horizon If you are invested in a managed fund (I.e. An Open-Ended Investment Company (OEIC) or Unit Trust) which has exposure to equities, time can be a great healer. Providing it is well-run, the fund will undoubtedly endure peaks and troughs over a period of time. This is why, as an Adviser, I only advise Clients with a realistic 5 year (or more) time horizon. It is by no means guaranteed, but the greater the time invested, the greater the potential return. Attitude to Investment risk What can you stand? It is all well and good if you are a young person dabbling in ‘Oily’ shares, but less likely that you can entertain a lot of risk if you are investing your hard-earned savings with a 10-year time horizon, or looking to contribute to a Pension for a secure retirement. A good risk questionnaire will ascertain – through experience, goals, etc. – your personal tolerance i.e. 5/10 (= ‘Medium’ or ‘Balanced’). This largely dictates the... Diversification of assets ...within your Investment portfolio. It is highly likely, especially if you seek the opinion and help of an Independent Financial Adviser (IFA), that you will not invest solely in the above managed fund. Instead, it can be wise to spread your investment across different asset classes. For example, a lower-risk Investor may have a minimal exposure to Equities and Property, but the majority of their Investment in Corporate Bonds or Gilts. Of course, a higher-risk Investor’s portfolio will likely be more Equity-laden. There are some good tools for IFAs which model outcomes and the like, helping build the foundation of an individual’s asset allocation. The phrase ‘Not putting all your eggs in one basket’ is apt. As well as diversifying assets within an investment, you may have a spread of products i.e. Cash, ISA, OEIC, Investment Bond, Pension, etc. to suit different goals and time horizons. By having a spread of investments, even in one product containing managed funds specialising in controlling different asset classes, this aids the minimisation of volatility (to whatever degree) of the portfolio...history telling us that different asset classes are often ‘non-correlated’ i.e. if Property falls, Equities may be on the rise (Simplistically, accepting the money coming out of Property). You can take this a step further. Different fund managers will have different styles, mandates, and attitude to risk themselves. Thus, even in the same Investment fund sector, you will find funds that differ wildly in the amount of volatility they experience compared to their peers. I’ll stop there; having turned what I thought would be a 3-paragraph blog into something sprawling! Until next time...