- Diversification can help to manage risk.
- You may avoid costly mistakes by adopting a risk level you can live with.
It’s easy to find people with investing ideas—your hairdresser, your neighbour, or an “inside tip” from a someone “in the know”. But these kinds of well-meaning but not necessarily informed suggestions aren’t a replacement for a real investment strategy.
At Virtue Money we believe that setting and maintaining your strategic asset allocation are amongst the most important ingredients in your long-term investment success. No matter what your situation, this means creating an investment mix based on your goals, risk tolerance, financial situation and timeline and being diversified both among and within different types of stocks, bonds and other investments.
Your portfolio needs a regular check-up. You should check your asset allocation at least once a year or any time your financial circumstances change significantly—things like losing you job or getting a big bonus. This is also a good time to review your existing assets and risk strategy to see if it still meets your current situation and future plans.
The aim of diversification is not necessarily to improve performance—it won’t ensure gains or guarantee against losses. However, once you choose to target a level of risk based on your goals, time horizon and tolerance for volatility, diversification may provide the potential to improve returns for that level of risk.
To build a diversified portfolio, you have to look for assets—stocks, bonds, cash, or others—whose returns haven’t historically moved in the same direction and to the same degree; and, ideally, assets whose returns typically move in opposite directions. This way, even if a bit of your portfolio is not performing so well, the rest of your portfolio is more likely to be growing, or at least performing better. This means that you can potentially offset some of the impact that a poorly performing asset class can have on an overall portfolio.
A diversified approach can help to manage risk, while maintaining exposure to market growth.
Why is it so important to have a risk level you can live with?
The value of a diversified portfolio usually reveals itself over time. Unfortunately, many people struggle to fully realise the benefits of their investment strategy because when markets are on the up, they tend to chase performance and purchase higher-risk investments. When there is a market downturn they do the opposite and look to move to lower-risk investment options. These are actions which can lead to missed opportunities.
It is important to understand that the decisions that you make about how to diversify, the time you choose to get into or out of the market, as well as fees you pay or underperforming funds choose, can cause you to generate returns far lower than the overall market.
Having a plan that includes appropriate asset allocation tailored to your attitude to risk and reviewing your portfolio on a regular basis can help you overcome (to a certain degree) the challenge of an uncertain market.
We will shortly be running our next Virtue Money Pre-retirement seminar, which is completely free of charge. We will have guest speakers and will touch on the following, Wills, Powers of Attorneys, Tax, Health and of course Pensions.
If you would like register your interest, or indeed make an appointment to speak to one of our advisers, please contact me, Susan Ralston, directly on 0345 034 3424 or email me at Susan@virtuemoney.com.